This post was written prior to our January 2017 merger, under our previous firm name, Aikins, MacAulay & Thorvaldson LLP.
Securities laws are a complex mix of provincial legislation and regulations, as well as rules, policies and other regulatory instruments adopted by securities commissions. Securities are provincially regulated in Canada and therefore if a person or company is raising capital in more than one province or territory of Canada, the securities laws of all of the relevant jurisdictions will apply.
Purposes of Securities Laws
There are two primary purposes of securities laws – the first is to protect the investing public; the second is to promote efficient capital markets, which enables persons seeking investment capital to raise it in a timely and cost effective manner. Securities laws and securities regulators have the difficult task of striking the right balance between these two (often competing) objectives.
From an investor protection standpoint, securities laws generally require persons seeking to raise capital to comply with onerous registration and disclosure requirements. For example, the general requirement is that an entity raising capital must file and clear a detailed disclosure document (a prospectus) with each applicable securities commission and deliver it to every investor.
From the standpoint of ensuring that capital markets are efficient, and in recognition of the time and expense involved in complying with the prospectus requirement, securities laws provide for certain exemptions from this requirement in circumstances where the regulators have determined that investors do not require the additional protection provided by a prospectus.
Securities Laws and Real Estate
The legal definition of a “security” is very broad and includes, among other things, equity securities such as shares of a corporation and units of a limited partnership or trust. Also captured by the definition is any kind of debt instrument, such as mortgages or promissory notes. Accordingly, securities laws will apply to many real estate financings.
While publicly traded real estate issuers will often fund a portion of acquisition or development costs by way of a prospectus offering, it is often necessary for other entities to raise funds by way of a “private placement” in reliance on one or more exemptions from the prospectus requirement.
With respect to debt financing, when mortgage debt financing is provided by a bank or other financial institution, securities laws exempt the financing from the prospectus requirement. Similarly, if the principals of a private company are the sole contributors of equity for the project, securities laws will typically exempt the equity securities from the prospectus requirement.
If, however, these traditional sources of financing are not available and a project must be financed through the issuance of subordinated debt to investors who are not financial institutions, or through the issuance of equity securities to persons who are not principals of the company, then it will be critical to conduct a detailed securities law analysis to confirm the availability of a prospectus exemption and that the documentation provided to the potential investors does not create liability for the issuer and its directors, officers and promoters.
A Word of Caution Regarding Co-ownerships and Joint Ventures
A parting word of caution – the application of securities laws can be less clear in the case of a co-ownership or joint venture interest. These interests are generally not found to constitute “securities” because investors retain control over their investment, have access to important information and have the ability to protect themselves from the manager. However, courts and securities commissions have found that co-ownership or joint venture interests may constitute a “security” if:
- the governing agreement leaves so little power in the hands of the co-owner or venture that the arrangement distributes power akin to a limited partnership;
- the co-owner or venturer is so inexperienced and unknowledgeable in business affairs that he or she is incapable of intelligently exercising his or her powers; or
- the co-owner or venture is so dependent on some unique entrepreneurial or managerial ability of the manager that he or she cannot replace the manager or otherwise exercise meaningful powers.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.