Raising capital in the real estate context, whether through large-scale investment or by smaller, more focused means, can be an intricate, time-consuming and expensive process. Developers and others raising capital need to be mindful of various considerations when operating in this arena, depending on whether their investors are pension funds, private investment vehicles or individual investors.
Up until recently, investments in non-prospectus based real estate private equity vehicles by individuals was based on the use of the accredited investor exemption under the Securities Act (Ontario). The accredited investor exemption permits the issuance of securities by an issuer to an accredited investor without the requirement for a prospectus. There are various tests for what constitutes an accredited investor. Four of the most common are (i) an individual who, either alone or with a spouse, owns financial assets worth more than $1,000,000 before taxes, but net of related liabilities, (ii) an individual who, either alone or with a spouse, has net assets of at least $5,000,000, (iii) an individual whose net income before taxes exceeded $200,000 in both of the last two years and who expects to exceed the same level of income in the current year, or (iv) an individual whose net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and who expects to exceed the same level of income in the current year.
The monetary threshold for an accredited investor is high, meaning that investment in real estate securities or units not offered to the public through the prospectus requirement was traditionally not possible for lower-income or lower net worth investors. In many contexts, over the last few years, we have seen how effective crowd-funding can be in raising capital, particularly when combined with the use of social media outlets. Until recently, crowdfunding was not permitted in capital-raising contexts, including in the real estate industry, without violating provincial securities laws.
This has now changed with the recent publication of Multilateral Instrument 45-108 Crowdfunding (“MI 45-108”) by the securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia. MI 45-108 provides a crowdfunding prospectus exemption and a registration framework for the operation of funding portals which allow eligible issuers to raise capital by offering certain types of securities to a large number of investors online through a funding portal operated by a registered dealer. The prospectus exemption granted by MI 45-108 is subject to a number of terms and conditions, including prescribed investment limitations and the delivery of a crowdfunding offering document in lieu of a prospectus, which are intended to address the dual objectives of protecting investors while affording issuers with efficient access to capital.
We have now started to see some real-estate specific online funding portals to allow investors to benefit from the crowdfunding exemption. It remains to be seen how this new exemption will operate in practice, but for certain real-estate specific securities, this exemption is another tool in the toolbox for real estate players to find equity in a very demanding market.