- Joined
- Sep 25, 2007
- Messages
- 201
Hi all,
[This post has also been included in the "Expert" section where Drew`s original post has been moved to.]
After reading Drew`s original post I decided to do my own due diligence on this issue. I really only expected to confirm Drew`s findings given the extent of his research and the expertise of his securities lawyer. A friend of mine is a partner in one of the big law Firms downtown (Vancouver). I forwarded her Drew`s post and she passed it on to their securities department. The response was that Drew`s post was correct. As I wanted to get more detail on the specifics to determine how, exactly, this legislation impacts my business I had a 90-minute meeting with one of their top securities lawyers. After the meeting I prepared a summary of our discussion points and sent it back to him for review to ensure that I had summarized my understanding of our conversation correctly. My summary follows; the comments in all CAPS were added by the lawyer to clarify.
I liken this situation to the banks` sand box rules that Peter Kinch always refers to. I can whine, complain, say it`s not fair, be in denial and pretend this legislation doesn`t exist, make a decision to ignore it or I can change how I do business to ensure that I am in compliance with the legislation. For me, personally, there is an additional risk. Because I am a CA, if I were ever to become involved in such an investigation it would have to be reported to the Institute of Chartered Accountants of BC and I could lose my designation. Based on the following information and my legal advice I have made a decision to change my target niche to accredited investors and individuals who have at least $150,000 in capital (cash, home equity and liquid investments). Somebody said to me "that won`t be easy". My response was that if I believe that it won`t be easy it won`t be; if I believe that I can do it (which I do) I will. And to quote Donald Trump, "Nothing is easy. But who wants nothing."
I hope this adds some clarity for you. Also, keep in mind that these details are specific to British Columbia. Although each province has Securities Legislation, the specifics may differ.
One final comment – I would strongly suggest not asking other REIN members legal questions (unless lawyers in the "Experts" section); get your own lawyer and advice tailored to your specific circumstances and don`t give advice if you are not a (in this case securities) lawyer.
Keith
Summary:
[*]An interest in a joint venture acquired from the contributions made by each party to a joint venture agreement is a security and is subject to the British Columbia Securities Act [in a nutshell, any "opportunity" whereby an individual(s) exchanges capital for a return on, and a return of, that capital is a security offering];
There is no such thing as a "template" or "generic" prospectus that can be drafted once and then used over and over again on all future joint venture transactions (for example, the address is changed for the next property to be purchased by the new joint venture investors). Each prospectus must attach to an individual security (joint venture interest) and, accordingly, a new prospectus is required for each joint venture; [CORRECT, BUT YOU COULD HAVE SET STYLE FOR A PROSPECTUS AND KEEP RE-USING. IT STILL ISN`T PRACTICAL AS THE COSTS ARE STILL HIGH AND IT TAKES A LONG TIME.] [*]A single joint venture can hold more than one property;
[*]Although there are many different exemptions, the most common one the joint venture would use is the "private issuer" exemption;
[*]Under the "private issuer" exemption, each joint venture can sell interests to a maximum of 50 close personal friends, close business associates, relatives and "accredited investors" [The "maximum of 50" refers to the number of joint venture interest holders that each joint venture can have];
[*]There are a couple of other exemptions that may be accessed. One example is the "$150,000" exemption. Under this exemption, one individual must invest at least $150,000 pursuant to a single security offering (in this case, a single joint venture interest);
[The basis for this exemption is as follows – securities legislation is aimed at protecting unsophisticated ("widows and orphans") "investors". Now, let`s say an individual has capital (cash, investments, home equity) in the amount of $100,000 available to invest. If the "private issuer" exemption doesn`t apply, BC securities legislation requires that either the "offering memorandum" exemption or a prospectus be issued to protect this individual. If, on the other hand, the individual has capital of $150,000 to invest and is either sophisticated enough, or stupid enough, to invest it in a single investment he/she is considered to be capable of fending for him/herself.];
[This post has also been included in the "Expert" section where Drew`s original post has been moved to.]
After reading Drew`s original post I decided to do my own due diligence on this issue. I really only expected to confirm Drew`s findings given the extent of his research and the expertise of his securities lawyer. A friend of mine is a partner in one of the big law Firms downtown (Vancouver). I forwarded her Drew`s post and she passed it on to their securities department. The response was that Drew`s post was correct. As I wanted to get more detail on the specifics to determine how, exactly, this legislation impacts my business I had a 90-minute meeting with one of their top securities lawyers. After the meeting I prepared a summary of our discussion points and sent it back to him for review to ensure that I had summarized my understanding of our conversation correctly. My summary follows; the comments in all CAPS were added by the lawyer to clarify.
I liken this situation to the banks` sand box rules that Peter Kinch always refers to. I can whine, complain, say it`s not fair, be in denial and pretend this legislation doesn`t exist, make a decision to ignore it or I can change how I do business to ensure that I am in compliance with the legislation. For me, personally, there is an additional risk. Because I am a CA, if I were ever to become involved in such an investigation it would have to be reported to the Institute of Chartered Accountants of BC and I could lose my designation. Based on the following information and my legal advice I have made a decision to change my target niche to accredited investors and individuals who have at least $150,000 in capital (cash, home equity and liquid investments). Somebody said to me "that won`t be easy". My response was that if I believe that it won`t be easy it won`t be; if I believe that I can do it (which I do) I will. And to quote Donald Trump, "Nothing is easy. But who wants nothing."
I hope this adds some clarity for you. Also, keep in mind that these details are specific to British Columbia. Although each province has Securities Legislation, the specifics may differ.
One final comment – I would strongly suggest not asking other REIN members legal questions (unless lawyers in the "Experts" section); get your own lawyer and advice tailored to your specific circumstances and don`t give advice if you are not a (in this case securities) lawyer.
Keith
Summary:
[*]An interest in a joint venture acquired from the contributions made by each party to a joint venture agreement is a security and is subject to the British Columbia Securities Act [in a nutshell, any "opportunity" whereby an individual(s) exchanges capital for a return on, and a return of, that capital is a security offering];
- The general rule, in simple terms, is that the joint venture needs to file a prospectus or access an exemption from the requirement to file a prospectus;
As a prospectus takes four to six months and costs hundreds of thousands of dollars, investors who will be raising capital to invest in real restate under a joint venture structure want to access exemptions;
There is no such thing as a "template" or "generic" prospectus that can be drafted once and then used over and over again on all future joint venture transactions (for example, the address is changed for the next property to be purchased by the new joint venture investors). Each prospectus must attach to an individual security (joint venture interest) and, accordingly, a new prospectus is required for each joint venture; [CORRECT, BUT YOU COULD HAVE SET STYLE FOR A PROSPECTUS AND KEEP RE-USING. IT STILL ISN`T PRACTICAL AS THE COSTS ARE STILL HIGH AND IT TAKES A LONG TIME.] [*]A single joint venture can hold more than one property;
[*]Although there are many different exemptions, the most common one the joint venture would use is the "private issuer" exemption;
[*]Under the "private issuer" exemption, each joint venture can sell interests to a maximum of 50 close personal friends, close business associates, relatives and "accredited investors" [The "maximum of 50" refers to the number of joint venture interest holders that each joint venture can have];
- "Close" and "close personal" are questions of fact and are not to be confused with "friend" and "business associate";
[As examples, my friend that I met at university and have known for ~25 years would be categorized as "close personal". My wife`s friend who she has known since elementary school (and who I know) is her close personal friend (in this case, she is not
- my close personal friend). Using my business as an example, Dragonfly Properties is not incorporated (it is a proprietorship). If my wife`s friend is going to have a 50% interest in a joint venture with Dragonfly Properties and my wife is not
- going to sign the joint venture agreement with me under Dragonfly Properties (i.e., not a partnership) I will need a prospectus (or an "offering memorandum" as noted below). Friends and business associates begin as relationships and can take years to reach the "close personal" stage; somebody you met three months ago, for example, will have a difficult time qualifying as a close personal friend or business associate. Although we didn`t discuss this, I have read several times that if most people have 5 or 6 close personal friends during their lifetime they can consider themselves fortunate. The point being that you will never make a case that all of your "friends" are "close personal" friends and your "business associates" are "close" business associates [so don`t bother trying]; [CORRECT; WHO KNOWS IF THE NUMBER IS 5 OR 6. IT IS DIFFICULT TO SEE HOW YOU CAN HAVE 50, THOUGH.]
- Accredited investors include individuals who (i) earned $200,000 in the last two years or (ii) earned $300,000 with their spouse combined in the last two years or (iii) have $1,000,000 in financial assets (this does not include the net worth of their principal residence or their RRSPs) or (iv) is a corporation with net assets of $5,000,000. Due diligence on the part of the investor(s) raising the funds does not extend to "proving" that an individual claiming to be an accredited investor is, in fact, one. Listing the criteria that an individual must satisfy to qualify as an accredited investor is sufficient; [AND THAT PERSON ACKNOWLEDGES THAT HE IS ACCREDITED AND YOU DON`T KNOW FOR A FACT THAT HE IS LYING ON THE FORM]
If the "private issuer" criteria has been met, the investor(s) raising the funds by issuing joint venture interests is not required to make any filings with the BC Securities Commission;
Another exemption is an "offering memorandum - Accredited investors include individuals who (i) earned $200,000 in the last two years or (ii) earned $300,000 with their spouse combined in the last two years or (iii) have $1,000,000 in financial assets (this does not include the net worth of their principal residence or their RRSPs) or (iv) is a corporation with net assets of $5,000,000. Due diligence on the part of the investor(s) raising the funds does not extend to "proving" that an individual claiming to be an accredited investor is, in fact, one. Listing the criteria that an individual must satisfy to qualify as an accredited investor is sufficient; [AND THAT PERSON ACKNOWLEDGES THAT HE IS ACCREDITED AND YOU DON`T KNOW FOR A FACT THAT HE IS LYING ON THE FORM]
- ". It isn`t used as much because it is more costly to prepare (around $25,000) and, as for the prospectus, each offering memorandum is good for only one security issue. Filings must be made with the BC Securities Commission within 10 days of issuing securities (the interests in the joint venture agreement). An offering memorandum allows the investor(s) to sell to anyone in British Columbia;
[*]There are a couple of other exemptions that may be accessed. One example is the "$150,000" exemption. Under this exemption, one individual must invest at least $150,000 pursuant to a single security offering (in this case, a single joint venture interest);
[The basis for this exemption is as follows – securities legislation is aimed at protecting unsophisticated ("widows and orphans") "investors". Now, let`s say an individual has capital (cash, investments, home equity) in the amount of $100,000 available to invest. If the "private issuer" exemption doesn`t apply, BC securities legislation requires that either the "offering memorandum" exemption or a prospectus be issued to protect this individual. If, on the other hand, the individual has capital of $150,000 to invest and is either sophisticated enough, or stupid enough, to invest it in a single investment he/she is considered to be capable of fending for him/herself.];
- Don`t ever state or imply a guaranteed rate of return. An example of implying a rate of return would be using the returns on real estate investments in certain Alberta markets in recent years. These are "home runs" that we all like to get but are in no way typical or representative of the returns that investors can expect to get in a "normal", sustainable market. Guaranteed or implied rates of returns are high on the Securities Commission`s hit list;
- Real estate investors are not investment advisors and, as such, cannot offer advice; [For example, explaining to your potential investors how to use their RRSPs or the equity in their home to invest in real estate can be considered to be offering investment advice.];
- The Securities Commission approaches investigations in the same way that that CRA (Canada Customs and Revenue Agency) does – they investigate those situations that are considered to have the greatest probability of success and monetary recovery. [Accordingly, the more properties that you have, the more joint venture structures you invest through and the more interests in joint ventures you have issued the greater the likelihood you have of one day being investigated.]; [THEY WILL ALSO INVESTIGATE BASED ON COMPLAINTS]
- If you are ever investigated and are found to be in violation of securities legislation penalties can include fines (up to $1 million - IT MIGHT BE $3M), jail time and being put out of business (not being able to raise capital in BC) and having to return the money to your existing investors among other things.
Anybody who already has, or has plans to build, a portfolio of properties in all probability already is, or will be, in a position where an "offering memorandum" exemption or prospectus was, is, or will be, required. An investor who finds him or herself in this situation is playing in a gray zone.
If an investor is, or will be, facing this situation and makes a decision not to comply with BC Securities Legislation a business decision has been made to accept this business risk. Each investor raising capital, then, has to decide whether he, she or they are willing to accept this business risk; [I DON`T ENCOURAGE OR ADVISE THAT YOU BREAK THE LAW] - If you are ever investigated and are found to be in violation of securities legislation penalties can include fines (up to $1 million - IT MIGHT BE $3M), jail time and being put out of business (not being able to raise capital in BC) and having to return the money to your existing investors among other things.
If you are not sure about your existing portfolio or an upcoming investment, consult with a lawyer who specializes in securities legislation and who can advise you on your best course of action. - The Securities Commission approaches investigations in the same way that that CRA (Canada Customs and Revenue Agency) does – they investigate those situations that are considered to have the greatest probability of success and monetary recovery. [Accordingly, the more properties that you have, the more joint venture structures you invest through and the more interests in joint ventures you have issued the greater the likelihood you have of one day being investigated.]; [THEY WILL ALSO INVESTIGATE BASED ON COMPLAINTS]
Ignorance is not a defense for not complying with the law. - Real estate investors are not investment advisors and, as such, cannot offer advice; [For example, explaining to your potential investors how to use their RRSPs or the equity in their home to invest in real estate can be considered to be offering investment advice.];
