Disclosure Requirements for Real Estate Development : Maybe Not Just Under REDMA
When real estate developers consider disclosure requirements they commonly think of the obligations under the Real Estate Development Marketing Act. However, depending on the structure of the developer, there may also be disclosure and/or filing requirements under the Securities Act (British Columbia) (the “Securities Act”)
The recent findings by the British Columbia Securities Commission in Re Wong (2016 BCSECCOM 208) confirm the disclosure obligations in relation to joint venture interests. In Re Wong, two sisters were developing projects through various companies and were selling joint venture interests in the projects. The Securities Commission considered whether the sale of the joint venture interests were subject to the Securities Act.
The Securities Act requires that a security must not be distributed unless a preliminary prospectus and a prospectus respecting the security have been filed, or the distribution is exempted under the Act. The Act defines “security” to include an “investment contract”. Although “investment contract ‘ is not defined in the Act, the Supreme Court of Canada in Pacific Coast Coin Exchange of Canada et al. vs Ontario Securities Commission (1978 2 SCR 112) defined an investment contract to be “ … an investment of money in a common enterprise with profits to come solely from the efforts of others.”
The parties accepted that the joint venture interest was an investment of money in a common enterprise. The question for the Commission was whether the joint venture interest was intended to make a profit solely from the efforts of others. The Commission found that the joint venture investors intended to pay their investment amounts, and then let the sisters develop the property without input from the investors. On that basis, the Commission found the joint venture interests to be a security, the distribution of which required compliance with the Securities Act.
The distribution of many joint venture interests will not be subject to the Securities Act as each joint venturer will commonly be involved in the development of the project. However, consider a couple of common scenarios:
- A developer approaches a land owner to enter into a joint venture in which the land owner will provide his land to the joint venture, the developer will develop the land and the parties will split the profits;
- A lender invests mezzanine financing money into a joint venture on terms in which each of the lender and developer are joint venturers, the lender takes back a modest return, the developer develops the property and the parties split the profits.
In either situation, depending on the terms of the Joint Venture Agreement, the sophistication of each party and the level of involvement of each party in the development, the joint venture interest may be considered a security, and the distribution of the security required to comply with the Securities Act.
This article was co-authored by Bradley Cronquist and Keith Inman. Keith is an Alberta and B.C. securities lawyer who can be reached at 250-869-1195 or by email at firstname.lastname@example.org