Incorporating a Mortgage Investment Corporation (“MIC”) in British Columbia: Key Regulatory Considerations and Capital Raising Strategies

Entrepreneurs are increasingly considering incorporating Mortgage Investment Corporation (“MIC”) to tap into Real estate industry. MICs, established under section 130.1 of the Income Tax Act (Canada), offer a tax-efficient vehicle for pooling investor capital and investing in mortgages. However, setting up and raising capital for a MIC in British Columbia (“BC”) involves navigating a complex regulatory landscape, including prospectus exemptions and compliance with securities laws. This article provides an overview of the key considerations for incorporating a MIC in BC, with a focus on raising capital through the Offering Memorandum (“OM”) exemption and the role of Exempt Market Dealers (“EMD”).

What is a MIC?

A MIC is a special-purpose vehicle designed to invest primarily in residential and commercial mortgages for properties located within Canada. MICs pool investor funds to lend to individuals or developers, thereby generating income through interest on loans, which is distributed to investors. These corporations’ benefit from flow-through taxation, meaning that all income is passed on to shareholders and taxed in their hands, not at the corporate level.

Regulatory Requirements for Incorporating a MIC in BC

Before diving into capital raising strategies, it’s crucial to ensure your MIC is incorporated in accordance with the regulatory requirements:

1. Corporate Structure: The MIC should be incorporated under the Business Corporations Act (BC) or the federal Canada Business Corporations Act (CBCA).

2. Capital Structure: Private MICs typically issued two classes of shares, common and preferred. Common shares are typically issued to MIC founders, directors and officers. Common Shares have voting rights, are typically not entitled to dividends and have no redemption feature but participate in the distribution of MIC assets after preferred shareholders receive accrued but unpaid dividends. Preferred shares are typically issued to investors and receive all the economic benefits of the MIC assets.

3. Shareholders: There are 20 or more shareholders of the corporation and no shareholder of the corporation (together with certain persons related to the shareholder) owns, directly or indirectly, more than 25% of the issued shares of any class of the capital stock of the MIC (certain “look-through” rules apply in respect of trusts and partnerships).

4. MIC Management Fees: MICs are typically managed by affiliated management entities controlled by principals of the MIC under a management and administration agreement where the manager provides for services related to the administration of the MIC’s mortgage portfolio and business. In exchange for these services, MICs typically pay the manager a prescribed fees.

5. Securities Law Compliance: MIC shares are considered securities under provincial law, so offering shares to investors triggers the requirement to comply with BC’s Securities Act and regulations overseen by the BC Securities Commission (BCSC).

Capital Raising: Navigating the Exempt Market

MICs typically raise capital through the exempt market, where companies can issue securities without having to file a prospectus. However, MICs must still comply with certain prospectus exemptions. The most commonly used exemption for MICs is the Offering Memorandum (“OM”) Exemption under National Instrument 45-106 Prospectus Exemptions (NI 45-106).

1. The Offering Memorandum Exemption (OM Exemption)

The OM exemption allows MICs to raise capital from a broad range of investors, including those who may not qualify as "accredited investors" under securities laws. This exemption is particularly attractive because it opens the door to non-institutional and retail investors who want to participate in private mortgage lending.

Here’s how the OM exemption works in BC:

• Eligibility: The OM exemption is available to both accredited and non-accredited investors. Non-accredited investors are subject to investment limits based on their financial circumstances.

• Disclosure Requirements: An OM must be provided to investors. This document outlines critical information about the MIC, including its business, financial statements, management, risks, and the terms of the offering. The OM must comply with the detailed disclosure requirements set out in NI 45-106.

• Investor Limits: Non-accredited investors are limited to investing up to $10,000 annually under the OM exemption unless they are "eligible investors" (those with higher net worth or income). Eligible investors can invest up to $30,000, and those who have received suitability advice from a portfolio manager or Exempt Market Dealer (“EMD”) can invest up to $100,000.

• Filing with the BCSC: The OM must be filed with the BCSC within 10 days of distributing the securities to investors.

2. Role of Exempt Market Dealers (“EMDs”)

Under NI 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations, companies raising capital in the exempt market must use a registered dealer, such as an EMD, unless they are able to rely on specific exemptions from the dealer registration requirement.

EMDs play a crucial role in the exempt market for MICs by:

• Distributing Securities: EMDs are registered to distribute securities to investors in the exempt market. They ensure that the offering complies with all regulatory requirements and provide advice on the suitability of investments for particular investors.

• Conducting Due Diligence: EMDs conduct due diligence on the issuer (in this case, the MIC), ensuring that the information in the OM is accurate and that the MIC's business model is sound.

• Investor Protection: EMDs must meet "know-your-client" (KYC) and "know-your-product" (KYP) obligations, ensuring that investments are suitable for each investor’s risk tolerance and financial circumstances.

Other Common Exemptions

In addition to the OM exemption, MICs may raise capital through other prospectus exemptions, such as:

• Accredited Investor Exemption: This exemption allows MICs to raise capital from high-net-worth individuals or institutional investors without a prospectus. However, the pool of potential investors is smaller than with the OM exemption.

• Family, Friends, and Business Associates Exemption: This allows MICs to raise capital from those with close ties to the corporation’s directors, officers, and founders.

Conclusion

Raising capital for a MIC in British Columbia presents both opportunities and regulatory challenges. While the OM exemption offers a valuable pathway for reaching a broader investor base, it comes with significant disclosure requirements and compliance obligations. Working with an Exempt Market Dealer is critical to ensure that the offering is compliant with securities laws and suitable for the target investor base.

MICs remain an attractive investment vehicle in BC's booming real estate sector. However, proper structuring, regulatory compliance, and capital-raising strategies are essential to success. Consulting with experienced securities counsel is key to navigating this complex landscape and positioning your MIC for long-term growth.

Need Assistance? For more information on incorporating a MIC or raising capital through the exempt market, feel free to contact our experienced securities law firm.

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.