CSA Proposed Amendments to NI 45-106 Prospectus Exemptions and 45-106CP related to the Offering Memorandum Prospectus Exemption

décembre 16, 2020

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CSA Proposed Amendments to NI 45-106 Prospectus Exemptions and 45-106CP related to the Offering Memorandum Prospectus Exemption 

Letter Summary:

The proposed amendments impact the disclosures that would be required to be included in an offering memorandum used by collective investment vehicles or issuers involved in real estate activities for purposes of the offering memorandum prospectus exemption. The new requirements will provide issuers with additional clarity as to what must be disclosed. As examples of additional disclosure that will be required for “collective investment vehicles” (i.e. an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities) will be the need to disclose penalties and sanctions for persons involved in the management of the investments and information regarding the performance of the portfolio. Most of the additional obligations will fall to those conducting “real estate activities”, which will be defined to include an issuer that intends to spend a material amount of the proceeds of the offering on an interest in real property. Such issuers will need to provide an independent appraisal of the properties in the portfolio. Additional tailored information would be required for developing real property such as a description of the approvals required, and the age, condition and occupancy level of real property that issuers own and operate. General amendments, such as requiring interim financial statements, and disclosing information on redemption/ retraction rights including unfulfilled requests, would be required for all issuers.

Overview of the Council’s Comments:

The CAC supports the approach where disclosure is standardized across issuers and supplemented with industry specific information in Schedules to the greatest extent possible. We urge the CSA to continue to consider emphasizing clear and prominent fee and conflict disclosures upfront on the face pages of the offering memorandum (“OM”) as an important investor protection mechanism. We would encourage the CSA to also consider imposing a “plain language requirement” for specific portions of the OM, including the summary section, with cross references to where more detailed disclosures can be found in the document. Given the length and detailed nature of the prescribed form of OM, we would suggest mandating that issuers include an easily understandable organizational chart of their structure, showing the flow of fees and other funds upfront. The Proposed Amendments do not focus on the current “Use of Available Funds” chart in the OM. However, we believe this chart must also be improved in order to help investors understand the projected gross return of an investment. We have concerns about issuers with a practice of utilizing overly promotional marketing materials which is not consistent with the disclosure in the corresponding OM. Even though issuers are required in several jurisdictions to incorporate OM marketing materials by reference into the OM, stricter rules on the composition of marketing materials is required to ensure they are balanced. They need to contain key material facts and disclosure about the investment structure, fees and risks. Assumptions used should be clearly disclosed, and the timing and likelihood of these assumptions occurring should be indicated where possible. A description of the assumptions is particularly important in the current economic environment, where business plans might take longer to materialize. We understand the inherently promotional nature of marketing materials, but regulators must set out their expectations for balanced marketing materials specifically in connection with the use of the revised OM Exemption. We are also supportive of harmonizing, when possible, prospectus exemptions across Canada for ease of use by registrants, investors and issuers and to reduce the possibility of regulatory arbitrage across jurisdictions. We encourage regulators to continue to try to provide uniform protections across the country to investors purchasing securities under the OM Exemption. In order to help fulfil the stated purpose of providing more certainty to issuers on the disclosure expectations, if the Proposed Amendments are adopted it would be helpful to quickly publish regulatory guidance identifying any issues so that they can be corrected and avoided in a timely manner.

Specific comments related to the Proposed Amendments:

Issuers Engaged in Real Estate Activities

The Proposed Amendments would require issuers engaged in real estate activities to provide an independent appraisal of an interest in real property to the investor in the specified circumstances, including if the issuer intends to spend a material amount of the proceeds of the offering on an interest in real property. Different issuers and their managers may interpret the term “material” differently and/or too liberally, which presents risks to investors. Additional regulatory guidance on this point would help balance the cost burden with the benefits of additional transparency when warranted. This requirement could be further expanded to require an appraisal within a shorter timeframe if there has been an event that has had a material adverse impact on the value of a property, but only in circumstances that in aggregate would have a material impact on the issuer’s total portfolio. 

Item 3.1(k) in Schedule 1 would require disclosure, for real property that the issuer leases to others, of the occupancy level as at a date not more than 60 days before the date of the OM. We believe the CSA should mandate additional disclosure if this metric is included. Such disclosure should include the potential biases in presenting the information, which may otherwise understate the risk and inflate the prospects of the offering.

We strongly support the additional disclosures contemplated by the Proposed Amendments for related party transactions. Issuers should also be required to disclose the basis or methodology of the amount of consideration, and whether an independent valuation was made available.

Issuers that are Collective Investment Vehicles

The Proposed Amendments would require collective investment vehicles to add specific disclosure on a new Schedule 2 to Form 45-106F2, including disclosure regarding the performance of the portfolio, in order to help provide prospective investors with additional information on the composition and performance of the portfolio. We think that additional guidance on the regulatory expectations for the preparation of performance numbers is important for issuers, particularly for those who may not have had to calculate performance numbers for distribution previously. The CSA should set out its expectations for the calculation and methodology used to present performance data over and above what is currently set out in the Proposed Amendments.

General Amendments

Many comments are made regarding Proposed Amendments intended to address disclosure issues, including, but not limited to, the following:

Support an electronically searchable OM

Support disclosure of a working capital deficiency or paid dividends or distributions that exceeded cash flow from operations

Suggest ensuring no gaps between new definition of a “related party” and that under IAS 24 Related Party Disclosures

Support the addition of a chart illustrating the issuer’s redemption and retraction history