45-702 - Exemptive Relief for Certain Real Estate Securities [BCN- Rescinded]
| Published Date: | 2001-04-27 |
|---|---|
| Effective Date: | 2001-04-26 |
| Rescinded Date: | 2009-09-28 |
[Para 1]
This BC Notice contains much of the content of former NIN#97/5 corrected for cross-references.
[Para 2]
The Commission issued NIN#96/36, dated October 10, 1996, to provide guidance on when sales of interests in real estate constitute investment contracts and, consequently, securities as defined in section 1(1) of the Securities Act. This notice provides background and discussion of
· BCI#45-512, which grants relief from the registration and prospectus requirements for Optional Rental Pool Securities and Resort Securities, as defined in the order;
· the availability of ad hoc discretionary relief;
· the issuance of BCI#45-513, which grants resale relief for purchasers who acquired Eligible Real Estate Securities, as defined in that order, prior to November 1, 1996; and
· certain marketing restrictions for real estate securities.
1. Registration and Prospectus Requirements
[Para 3]
A person that trades a real estate security must be registered under section 34(1)(a) of the Securities Act, rely on a statutory exemption from the registration requirements, or obtain a discretionary exemption order from the Commission or the Executive Director. In addition, a person that distributes a security must file a prospectus under section 61 of the Securities Act, rely on a statutory exemption from the requirement to file a prospectus, or obtain a discretionary exemption order from the Commission or the Executive Director. NIN#96/36 discussed a number of exemptions that may be used for real estate securities.
[Para 4]
The Commission considered that, under appropriate conditions, certain real estate securities offerings can be exempted from certain requirements of the Securities Act. The Commission has determined that blanket relief should be available for two types of Resort Securities and has approved in principle Staff’s proposed approach to deal with applications for discretionary relief.
(a) Blanket Relief for Optional Rental Pool Securities and Resort Securities
[Para 5]
BCI#45-512 provides registration and prospectus relief for Optional Rental Pool Securities and two types of Resort Securities. Both Optional Rental Pool Securities and Resort Securities are defined in BCI#45-512.
[Para 6]
To qualify as a Resort Security, the real estate property must be located in a ski resort area and must be subject to a restrictive covenant or other restriction in favour of the Province, a municipality or other government authority (other than a zoning restriction), that is registered against the title of the property, on the owner’s right to occupy the property.
[Para 7]
BCI#45-512 defines two types of Resort Securities, one where, although there is no restriction on the number of days per annum, season or other period that an owner may occupy the property, the property must be available for rent to the general public when it is not occupied by the owner (a Type A Resort Security), and one where the owner’s occupancy is limited to a stipulated maximum number of days per annum, season or other period by the government-imposed restriction, provided that such maximum number of days is at least 30 days per annum (a Type B Resort Security).
[Para 8]
Optional Rental Pool Securities and Resort Securities must not include, or purport to include, a rental or cash flow guarantee or other financial commitment on the part of any person connected with the offering. This restriction does not apply to guarantees offered by financial institutions in connection with interest rates offered on mortgages, however, as they are not considered to be a financial commitment on the part of any person connected with the offering.
[Para 9]
Under BCI#45-512, the Commission has exempted a developer, or an agent acting on its behalf, from the requirements to register to trade and to file a prospectus for an intended trade of an Optional Rental Pool Security or a Resort Security, provided that a number of conditions are met.
[Para 10]
These conditions include the requirement for the developer to file with the Superintendent of Real Estate, and to deliver to the purchaser before an agreement of purchase and sale is entered into, a disclosure statement or prospectus in the form required by BC Form 45-906F (the required form of offering memorandum under the Securities Rules for a distribution of real estate securities), excluding certain items of that form. Developers are reminded that where there are material changes to information disclosed in BC Form 45-906F, the disclosure must be amended to reflect these changes prior to using the document.
[Para 11]
For both rental pool arrangements and rental management arrangements, BCI#45-512 mandates that the rental pool agreement or rental management agreement, as the case may be, impose an irrevocable obligation on the developer or the manager to send to a holder certain ongoing financial information about the rental arrangement. There is also a requirement to deliver to any subsequent prospective purchaser certain financial information for the rental pool or rental management arrangement for each of the two most recent financial years. In addition, the rental pool agreement or rental management agreement must impose an irrevocable obligation on the holder of the security to notify the developer or the manager of an intended trade prior to selling an Optional Rental Pool Security or a Resort Security, and to notify subsequent prospective purchasers of their right to obtain from the developer or the manager the applicable documents. Developers are encouraged to advise potential purchasers of this obligation, as it would be considered material to the offering.
[Para 12]
In the case of a Type B Resort Security, BCI#45-512 also requires that the rental pool agreement or rental management agreement impose an irrevocable obligation on the developer or the manager to deliver to any subsequent prospective purchaser certain additional information about the rental arrangement. Depending on the timing of the trade, that disclosure may be either the disclosure statement or prospectus filed with the Superintendent of Real Estate, or a certified summary disclosure statement, as defined in BCI#45-512. Again, developers are reminded that where there are material changes to information disclosed in the disclosure document, the document must be amended to reflect these changes prior to using the document.
[Para 13]
For all trades by a developer, or an agent acting on its behalf, there is a requirement that there be no marketing of the expected economic benefits of the rental pool agreement or rental management agreement to a prospective purchaser.
[Para 14]
Under BCI#45-512, the Commission has also provided resale relief for any subsequent trade by a holder, other than by a developer or an agent acting on its behalf, in an Optional Rental Pool Security or a Resort Security acquired under BCI#45-512, BOR#97/1, or under BOR#96/19 from the registration and prospectus requirements of the Securities Act, provided that there is no advertising of the expected economic benefits of the rental pool agreement or rental management agreement to a subsequent prospective purchaser. The difference between marketing and advertising is discussed below under “Marketing of Real Estate Securities”.
[Para 15]
No filings with the Commission are required for trades done in compliance with BCI#45-512.
[Para 16]
Developers and rental pool managers should note that it is considered inappropriate for them to require holders of real estate securities to give blanket assignments of their right to vote in accordance with the Condominium Act or condominium bylaws, or to require holders to waive notice of meetings of a strata corporation. While developers and managers are not precluded from taking bona fide proxies on an optional basis where the owner is assigning the right to vote on specific matters, blanket proxies in favour of the developer or manager would be considered to be an assignment of the right to vote. Developers and managers should be aware that section 69 of the Condominium Act contains a deemed assignment of all rights, powers and obligations under that Act and bylaws in the case of a lease, sublease or assignment of lease of a residential strata lot for a term of three years or more. Accordingly, developers are strongly encouraged to structure their transactions without such arrangements.
[Para 17]
BCI#45-512 does not provide an exemption from the requirement in the Securities Act to be registered to act as an adviser. Only persons who are registered as advisers or exempt from the requirements to register as an adviser are permitted to give opinions on the investment merits of the Optional Rental Pool Security or Resort Security or to indicate that the investment would be suitable for any particular investor. Other persons, including those who are licensed under the Real Estate Act, are permitted only to give factual information about the Optional Rental Pool Security or Resort Security to prospective purchasers.
(b) Ad Hoc Discretionary Exemptive Relief
[Para 18]
Staff of the Commission has developed guidelines to deal with ad hoc applications in respect of real estate securities. In specific cases where it can be demonstrated, by reference both to the structure of the transaction and to the proposed marketing methods and materials, that the primary focus of the offering is owner occupancy of the units rather than anticipated rental revenue or economic return, staff of the Commission will generally be prepared to recommend to the Commission or the Executive Director, as the case may be, that some limited resale relief be provided, subject to appropriate conditions.
[Para 19]
Staff has identified four types of real estate securities for which limited resale relief may be available where the initial distribution by the developer was made in reliance on the $97,000 private placement exemption set out under sections 45(2)(5) and 74(2)(4) of the Securities Act (the “$97,000 exemption”). The four types are:
1. real estate securities that meet the definition of Optional Rental Pool Securities in BCI#45-512, with the exception that the securities may contain restrictions on occupancy beyond the restrictions set out in that definition;
2. real estate securities that meet the definition of Resort Securities in BCI#45-512, and for which the developer intends to market the expected economic benefits of the rental pool or management arrangements;
3. real estate securities that meet the definition of Resort Securities in BCI#45-512, with the exception that the restrictions on occupancy are greater than those imposed by the government restriction; and
4. real estate securities that are subject to mandatory restrictions on occupancy.
[Para 20]
Under each type of security noted above, the owners must have the right to occupy the property for at least 30 days per annum. This 30-day period must be a real 30-day period. Staff generally will not recommend relief where there are restrictions imposed, such as prohibitive service charges, that effectively discourage owners from using the property for the full 30 days. In addition, with respect to any of the above types of securities, staff generally will not recommend relief where rental or cash flow guarantees, or other financial commitments, are offered by any person connected with the offering.
[Para 21]
Staff generally will be prepared to recommend limited resale relief for these securities provided the resale meets the requirements of the $97,000 exemption, with one exception relating to advertising of the offering. Staff of the Commission expect that on resale these securities will commonly be advertised and sold in the same manner as other real estate (that is, through advertisements in the newspaper and multiple listing service or by signs on the owner’s property). If the owner advertises the offering, the owner would be subject to the requirement to prepare and provide an offering memorandum to a prospective purchaser. Owners are not generally in a position to be able to prepare an offering memorandum.
[Para 22]
Accordingly, staff generally will be prepared to recommend that relief be provided to owners (not developers) of the type of real estate securities described above, subject to the restrictions noted, to permit reliance on the $97,000 exemption for resales without requiring the owner to prepare an offering memorandum if the owner advertises the offering. This relief would be conditional on the inclusion of provisions in the rental management or rental pool agreement, similar to conditions (1)(d) to (i) under BCI#45-512, that irrevocably obligate the developer or manager to provide ongoing financial information to owners and a summary disclosure statement together with financial information to subsequent prospective purchasers. Developers and managers must also file the summary disclosure statement with the Commission. In addition, the requirements applicable to the use of future-oriented financial information, similar to condition (1)(c) under BCI#45-512, would apply. The concerns discussed above regarding the assignment of an owner’s right to obtain notice of, and vote at, meetings held under the Condominium Act are also applicable.
[Para 23]
Each application will be considered on its own merits and other conditions or requirements may be imposed depending on the nature of the offering. The Commission and the Executive Director retain their discretion as to whether or not to grant such exemptive relief in any particular circumstance.
(c) No Relief for Other Real Estate Securities
[Para 24]
Distributions of real estate securities that focus primarily on economic returns must comply fully with the Securities Act. Specifically, the following types of arrangements fall into this category:
1. mandatory rental pooling arrangements where the holder’s rights of occupancy are restricted to fewer than 30 days per annum; and
2. real estate securities where a form of rental or cash flow guarantee or other financial commitment is being offered in connection with the offering of the real estate.
(d) Other Real Estate Investments
[Para 25]
There are other types of real estate investments that may also be securities. The Commission recommends strongly that offerings of real estate that involve arrangements beyond the sale of real estate itself be examined on their own merits to determine whether the arrangements constitute investment contracts and, consequently, securities. The public should also be aware that an investment contract represents but one branch of the definition of a security in section 1(1) of the Securities Act. Other branches of the definition should also be considered. Anyone conducting an offering of securities must comply with the Securities Act and should seek legal advice if necessary.
2. Resale Relief for Purchasers who Acquired Eligible Real Estate Securities Prior to November 1, 1996
[Para 26]
The Commission, under BCI#45-513, grants relief from the registration and prospectus requirements of the Securities Act for resale by holders of Eligible Real Estate Securities that were distributed pursuant to an agreement of purchase and sale entered into prior to November 1, 1996 without having been in compliance with the Securities Act. Holders acquired these securities without the knowledge of any applicable resale restrictions. An Eligible Real Estate Security is defined in BCI#45-513 to be an investment contract that is comprised of a direct interest in real property together with a rental pool agreement or rental management agreement that does not include, or purport to include, any rental or cash flow guarantee or other financial commitment.
[Para 27]
As a result of this order, holders of Eligible Real Estate Securities will not be required to prepare a prospectus or offering memorandum in order to sell their property, regardless of whether or not the developer has regularized the distribution. In order to avail oneself of this relief, however, the holder, or any agent acting on the holder’s behalf, must not advertise the expected economic benefits of any rental pool agreement to a prospective purchaser.
[Para 28]
The relief granted under this order is available only to a person, other than a developer, who obtained title to the Eligible Real Estate Security pursuant to an agreement of purchase and sale entered into prior to November 1, 1996.
3. Marketing of Real Estate Securities
[Para 29]
As noted in NIN#96/36, the Commission is particularly concerned about the methods and materials used in the marketing and promotion of real estate securities. The Commission expects all developers selling real estate securities to comply with all the restrictions on marketing contained in the Securities Act, Securities Rules and all applicable policy statements and notices. These restrictions include the following:
(a) section 50(1)(a) of the Securities Act, which prohibits a person from representing that the person will resell or repurchase the security or refund all or any of the purchase price of the security, subject to certain limited exceptions (note that this section does not prevent developers from returning deposits to purchasers where conditions precedent have not been satisfied);
(b) section 50(1)(b) of the Securities Act, which prohibits a person from giving an undertaking relating to the future value or price of a security;
(c) the guidelines specific to the marketing and promotion of real estate securities set out in NIN#96/36, including:
(i) the requirement that partial disclosure of facts and figures must be avoided when full disclosure of such facts and figures is required for a proper comprehension of the offering, and the requirement that any representation as to any benefit be balanced by all conditions and contingencies applicable to the benefit; and
(ii) the restriction on the use of words such as “guaranteed”, “preferred”, “liquid” and “indemnity” in any marketing or promotional materials or representations because of their frequent misinterpretation by purchasers, and the requirement that when other modifiers are used, their context must be made perfectly clear; and
(d) Interim National Policy Statement No. 42, which restricts advertising on radio or television.
[Para 30]
In NIN#96/36, the Commission indicates its expectation that advertisements and other promotional materials be worded so as to encourage recipients to consult the relevant disclosure document. Accordingly, all advertisements should contain a prominently displayed disclaimer such as the following:
There are risks associated with this investment. Any investor considering this investment should consult the disclosure statement.
In addition, advertisements and other promotional materials should disclose the name and address of at least one person from whom more information and a copy of the disclosure document may be obtained.
[Para 31]
Where a developer intends to market a return (which is not permitted if the developer is relying on BCI#45-512), the return must be supported by audited forecasts or projections contained in the disclosure document and prepared in accordance with section 4250 of the CICA Handbook and audited in accordance with the Assurance and Related Services Guidelines of the CICA Handbook entitled “AuG-6 Examination of a Financial Forecast or Projection Included in a Prospectus or Other Public Offering Document”. In such cases, the marketing materials should contain a disclaimer such as the following:
The rate of return is based on certain assumptions that may not apply to you. Actual results achieved may vary and the variation may be material. Any investor considering this investment should consult the completed audited [projections/forecasts] set out in the disclosure statement.
[Para 32]
Developers and their agents are strongly encouraged to seek legal advice about the marketing and promotion of real estate securities.
[Para 33]
The Executive Director has issued cease trading orders and imposed other sanctions where representations or disclosure in advertising were considered to be misleading.
[Para 34]
These guidelines, and the general prohibitions in the Securities Act against fraud and misrepresentation, apply to any offering of real estate securities, regardless of whether or not the trade is exempt from registration and prospectus requirements.
[Para 35]
In addition to the above requirements, the Real Estate Act contains various rules relating to the advertising of real estate by vendors and agents. It is strongly recommended that developers obtain proper legal advice with respect to all applicable Securities Act and Real Estate Act requirements relating to advertising, and instruct their representatives accordingly.
[Para 36]
As noted above, for all initial distributions by developers under BCI#45-512 there is a prohibition against “marketing” of the expected economic benefits of the rental pool agreement or rental management agreement. For trades by holders to subsequent prospective purchasers under that order, as well as for all trades by existing holders under BCI#45-513, the prohibition is against “advertising” of the expected economic benefits of the rental pool agreement. “Marketing” includes any communication intended to induce the purchase by a subsequent prospective purchaser, other than the provision of disclosure documents. “Marketing” is broadly defined in BCI#45-512.
[Para 37]
“Advertising” is a more limited term and includes the dissemination of information through the public media, such as the print media, on radio or television, by mail, facsimile, electronic mail and bulletin boards, the Internet or similar facilities, or through public promotions, such as billboards, signs or displays.
[Para 38]
The prohibition in the orders is against marketing or advertising, as the case may be, “to a prospective purchaser”. In the opinion of staff at the Commission, the placing of an advertisement in, for instance, a newspaper, journal or electronic bulletin board would be considered as an inducement to every prospective purchaser. On the other hand, developers and their agents who respond to a specific inquiry from a prospective purchaser with factual information contained in a disclosure document, including a response based on an audited projected rate of return contained in the disclosure document, will not be considered to be communicating with the intent to induce the purchase of the real estate security by a prospective purchaser.
April 26, 2001
Brent W. Aitken
Member
Ref: Condominium Act, section 69
Real Estate Act
Securities Act, sections 1, 45(2)(5), 74(2)(4)
Securities Rules
CICA Handbook, section 4250 and Assurance and Related Service Guidelines, AuG-6 Examination of a Financial Forecast or Projection Included in a Prospectus or Other Public Offering Document
BC Form 45-906F
NIN#96/36
BOR#96/19
BCI#45-512
BOR#97/11
BCI#45-513
Securities Act, sections 1, 45(2)(5), 74(2)(4)
Securities Rules
CICA Handbook, section 4250 and Assurance and Related Service Guidelines, AuG-6 Examination of a Financial Forecast or Projection Included in a Prospectus or Other Public Offering Document
BC Form 45-906F
NIN#96/36
BOR#96/19
BCI#45-512
BOR#97/11
BCI#45-513
This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.