Mortgage Investment Corporations (“MICs”) are on the rise in Canada. With many of these MICs the founders and managers are confused over what regulators may or may not govern certain aspects of running their business as a mortgage lender, a mortgage dealer or arranger such as mortgage broker or agent, a mortgage administrator and being in the business of raising money for the MIC.
Depending on how one operates and manages their MIC, the following is a very brief and generalized overview of which regulators may govern how you operate in Ontario.
First, and foremost a MIC’s primary purpose should be to qualify as a Mortgage Investment Corporation defined under section 130.1 of the Income Tax Act (Canada), which is further explained here. This would therefore mean that every MIC would first be regulated and governed by the Canada Revenue Agency (“CRA”) in determining if at all the operations and capital structure of the corporation qualifies the MIC as one.
Second, if a MIC intends to arrange mortgages for other lenders either to loan out alone on a mortgage or to syndicate with the MIC together, or if it arranges mortgages for borrowers funded by lenders other than the MIC, the MIC would be considered dealing in mortgages as defined under the Mortgage Brokerages, Lenders and Administrators Act (Ontario), and therefore governed and regulated by the Financial Services Commission of Ontario (“FSCO”) requiring the MIC to be a licensed mortgage brokerage or for its managers to be licensed mortgage agents or brokers registered with a licensed mortgage brokerage that the MIC works with to broker these mortgage deals. There is some change currently in the works whereby the regulatory and governing body here may change to the Office Of The Superintendent of Financial Institutions (Canada).
Third, if a MIC intends on managing mortgage monies such as administering loan advances on behalf of other lenders not just the MIC, receiving periodic mortgage payments from borrowers that belong to other lenders and not solely the MIC either in whole or in part, remitting split periodic mortgage payments from borrowers to the syndication of mortgage lenders including or not including the MIC, providing mortgage enforcement and custodian services whereby mortgage monies flow through the MIC in one way or another that belong to another lender on the mortgage loan, then the MIC would be considered an administrator under the Mortgage Brokerages, Lenders and Administrators Act (Ontario), and therefore governed and regulated by the Financial Services Commission of Ontario (“FSCO”) requiring the MIC to be a licensed mortgage administrator. There is some change currently in the works whereby the regulatory and governing body here may change to the Office Of The Superintendent of Financial Institutions (Canada).
Fourth, if the MIC intends to raise money through the sale or offering of any type of financial instrument including equity such as shares and/or debt such as promissory notes then it will most likely have to file a prospectus and register as a dealer under the Ontario Securities Commission in addition to filing the same in every other province of Canada you operate in or for which your investors are located. If a prospectus and/or dealer registration is not practical, as it usually is not for smaller private Mortgage Investment Corporation, then the MIC can only raise money under an Exemption defined under the provincial securities act, regulations and national instruments. For example National Instrument 45-106 provides for the details in which a company can raise money under an exemption from prospectus and dealer registration. Many MICs will only raise enough funds between 20 or so of the original founders and managers, in which case they may simply qualify under the private issuer exemption limit of 50 shareholders in total, however, once the MIC relies on any other commonly used exemption such as Friends, Family and Business Associates, Accredited Investor, Minimum Amount and/or Offering Memorandum then it may no longer raise any monies under the private issuer exemption pursuant to section 3.6(5) of the companion policy of National Instrument 45-106. Reliance on an exemption to raise monies in most cases requires a report to the provincial commission depending on where the investor is located and the same report in the province the issuer/MIC is located, of the exemptions relied on for each distribution/issuance of financial instruments (e.g. shares) within 10 days of the subscription (for non-investment funds such as a MIC). There are also very strict rules in paying out finders fees to those who find your MIC investors, such as no fees are payable depending on which exemptions are relied on when an investor subscribes.
Finally if a MIC is found to be actively in the business of raising monies as a private non-public (not listed on an exchange) corporation continually relying on an exemption, the MIC may also be required to register as an exempt market dealer (“EMD”) or only raise funds through the use of an EMD. Registering as an EMD will also mean strict governance and substantial errors and omissions insurance among other compliance requirements regulated by the applicable provincial commission such as the Ontario Securities Commission. Some MICs only raise enough to meet the attributes of qualifying as a MIC under the Income Tax Act (Canada) and to adequately fund their deal flow of mortgages. This may mean raising monies usually only for the first year or so as deal flow tapers off and mortgages begin to be paid out (private mortgages are usually for 12 month terms), hence these MICs are not usually found as actively raising funds, although this too needs to be judged on a case by case basis, and therefore may not need the services of an EMD or to register as one.
Each MIC needs to be carefully managed so that compliance is met with every possible regulatory and governing regime such as the CRA, OSC, and FSCO/OFSI. For any questions please contact us at Levy Zavet, Lawyers. This article is for information purposes and not in any way to be relied on as legal advice or a legal opinion.