Do MICs need to file an exempt distribution report for shares issued under a DRIP?

Should a Mortgage Investment Corporation (“MIC”), include exempt distributions of shares or other securities issued under a reinvestment plan (i.e. a DRIP or Dividend Reinvestment Plan), in its exempt distribution reports, 45-106F1? Exempt distribution reports are required under National Instrument policy NI 45-106 where an issuer relied on an exemption from prospectus for the following qualifications:

(a) section 2.3 [Accredited investor] or, in Ontario, section 73.3 of the Securities
Act (Ontario) [Accredited investor];
(b) section 2.5 [Family, friends and business associates];
(c) subsection 2.9 (1), (2) or (2.1) [Offering memorandum];
(d) section 2.10 [Minimum amount investment];
(e) section 2.12 [Asset acquisition];
(f) section 2.13 [Petroleum, natural gas and mining properties];
(g) section 2.14 [Securities for debt];
(h) section 2.19 [Additional investment in investment funds];
(i) section 2.30 [Isolated distribution by issuer];
(j) section 5.2 [TSX Venture Exchange offering];
(k) section 5A.2 [Listed issuer financing exemption]

You will notice above that section 2.2 [Reinvestment Plans] and section 2.4 [Private Issuer] are missing.

Thus, the answer for Non-Investment Funds, such as a MIC, is: NO, an exempt distribution report is not required each time you declare and issue dividends but instead issue stock dividends to those shareholders under your DRIP, provided that:

2 (1) Subject to subsections (3), (4) and (5), the prospectus requirement does not apply to
the following distributions by an issuer, or by a trustee, custodian or administrator acting for or
on behalf of the issuer, to a security holder of the issuer if the distributions are permitted by a
plan of the issuer:

     (a) a distribution of a security of the issuer’s own issue if a dividend or distribution
     out of earnings, surplus, capital or other sources payable in respect of the
     issuer’s securities is applied to the purchase of the security, and

     (b) subject to subsection (2), a distribution of a security of the issuer’s own issue if
     the security holder makes an optional cash payment to purchase the security
     of the issuer that trades on a marketplace.

(2) Subsection (1) does not apply unless the aggregate number of securities issued under
the optional cash payment referred to in subsection (1)(b) does not exceed, in the financial year
of the issuer during which the distribution takes place, 2% of the issued and outstanding
securities of the class to which the plan relates as at the beginning of the financial year.

(3) A plan that permits a distribution described in subsection (1)(a) or (b) must be available
to every security holder in Canada to which the dividend or distribution out of earnings, surplus,
capital or other sources is available.

(4) Subsection (1) does not apply to a distribution of a security of an investment fund.

(5) If the security distributed under a plan described in subsection (1) is of a different class
or series than the class or series of the security to which the dividend or distribution is
attributable, the issuer or the trustee, custodian or administrator must have provided to each
participant that is eligible to receive a security under the plan either a description of the material
attributes and characteristics of the security distributed under the plan or notice of a source from
which the participant can obtain the information without charge.

In other words, provided that a MIC’s DRIP:

1. Is comprised of a plan where the dividend issued by the MIC on a class or series of shares to its shareholders is invested in shares or other securities of that MIC for the benefit of the shareholder to which the dividend was issued;
2. The DRIP is offered to all such shareholders in Canada of that class(s) or series of shares to which the dividend under the DRIP applies;
3. The MIC maintain itself as a Non-Investment Fund;
4. If the shares or other securities issued under the DRIP through reinvesting the issued dividends are not of the same series or class of share on which the dividend was declared and issued, that the MIC provide the shareholders with details of the considerable differences in the rights, powers, privileges, obligations and characteristics of the different share class or series or other security issued under the DRIP, or direct the shareholders to the resource where they can learn of same.

For help with setting up, consulting, managing, administering or dealing with the day to day operations and underwriting, compliance and policy requirements of your Mortgage Investment Corporation, feel free to call on Jeff Levy, the managing partner and lawyer at Levy Zavet PC.