(2) Stewards Decision
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions –exemption from the prospectus requirement in securities legislation for issuer that operates a church community program for the purpose of making and administering mortgage loans and funding these mortgage loans by issuing and distributing fixed income securities (Bonds).
The Issuer is exempted from the prospectus requirement in securities legislation in connection with the distribution of Bonds – Issuer cannot comply with not for profit issuer prospectus exemption in s. 2.38 of National Instrument 45-106 Prospectus Exemptions (NI 45-106) – the issuer requires relief to permit certain modifications to the offering memorandum (OM) prospectus exemption in s. 2.9 of NI 45-106 – advice provided for purposes of subparagraph 2.9(2.1)(b)(iii) of NI 45-106 will be from a restricted dealer, with individuals acting on its behalf that are subject to the same proficiency requirements as a dealing representative of an exempt market dealer – relief needed to permit a restricted dealer to comply with subsection 2.9(5.2) of NI 45-106 for purposes of distributing OM marketing materials which have been approved in writing by the issuer, and other conditions of the OM prospectus exemption in s. 2.9 of NI 45-106 which require the use of prescribed forms to the extent that such forms currently do not refer to the category of “restricted dealer” in reference to registered firms – This decision expires in five years.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, ss. 53(1) and 74(1)
Multilateral Instrument 11-102 Passport System, s. 4.7(1)
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions
National Instrument 45-102 Resale of Securities, s. 2.5
National Instrument 45-106 Prospectus Exemptions, ss. 1.1, 2.3, 2.9, 2.38, 6.1, 6.3, 6.4, 6.5, Form 45-106F1, Form 45-106F2, Form 45-106F4, Form 45-106F16, and Form 45-106F17
August 30, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
(the Principal Jurisdiction)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
STEWARDS CANADA
(Stewards or the Filer)
DECISION
Background
The Filer operates the Bond Program (defined below) in the Stewards Community (defined below) for the purpose of making and administering mortgage loans for the building and renovating of churches, camps, nursing homes, schools, seminaries and colleges. It has funded these mortgage loans by issuing and distributing unsecured variable rate redeemable debt securities (each a Bond and, collectively, Bonds) to investors within the Stewards Community. The Filer has previously been granted Ontario-only, time-limited relief from the dealer registration requirement (the Prior Decisions). More details of the relief granted are set out in the Prior Decisions, which are dated November 13, 2013; December 21, 2018; March 26, 2019 and June 28, 2019.
The principal regulator in the Principal Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Principal Jurisdiction (the Legislation) for the following exemptive relief as provided for in this decision (collectively, the Exemptions Sought):
(a) an exemption from the prospectus requirement on the same terms and conditions as the ongoing prospectus exemption granted in the 2017 PFSG Decision (defined below), except with the modification in (b) below (the Ongoing Prospectus Exemption Sought); and
(b) modification of the ongoing prospectus exemption granted in the 2017 PFSG Decision to permit Stewards to file a Form 45-106F1 Report of Exempt Distribution (Form 45-106F1) monthly instead of within 10 days of a distribution (the Reporting Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator); and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, the Northwest Territories, Newfoundland and Labrador, Nunavut, Prince Edward Island, Québec, Saskatchewan, and Yukon (collectively, the Passport Jurisdictions, and together with the Principal Jurisdiction, the Jurisdictions and each a Jurisdiction).
Interpretation
(1) For the purposes of this decision:
(a) 2017 PFSG Decision means the following decision: In the Matter of Pentecostal Financial Services Group Inc., Pentecostal Securities Corp. and The Pentecostal Assemblies of Canada, dated June 21, 2017;
(b) Bond Investor means a Community Investor, Stewards Charity, Stewards Church or Stewards Trust that is an investor, or prospective investor, in Bonds;
(c) Bond Program means the issuance and distribution of Bonds to Bond Investors and the subsequent mortgage loans made by Stewards to congregations and other organizations within the Stewards Community;
(d) Community Investor means any individual within the Stewards Community, as well as any corporation, trust, partnership and estate associated with such individual;
(e) CSC means Covenant Securities Corp. (formerly Pentecostal Securities Corp.), a firm registered in the category of restricted dealer in each Jurisdiction other than Yukon;
(f) NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
(g) NI 45-106 means National Instrument 45-106 Prospectus Exemptions;
(h) Offering Memorandum means the offering memorandum in the form prescribed in Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers and prepared in compliance with this decision;
(i) OM Exemption means the prospectus exemption in section 2.9 of NI 45-106;
(j) PFSG Note Program means Pentecostal Financial Services Group Inc.’s mortgage business in the Pentecostal community funded by debt securities issued by Pentecostal Financial Services Group Inc.
(k) Stewards Charity means any registered Canadian charity administered by Stewards or otherwise operating principally for the benefit of the Stewards Community and “Stewards Charities” means more than one such charity;
(l) Stewards Church means any church in Canada associated or affiliated with Stewards or otherwise participating in mortgage financing provided by Stewards and “Stewards Churches” means more than one such church;
(m) Stewards Community means the Canadian community comprising Stewards Churches, Stewards Charities, Stewards Trusts, congregants, pastors, ministry leaders and associated individuals of Stewards Churches, including camps, nursing homes, schools, colleges, seminaries and similar institutions associated or affiliated with or sponsored by Stewards Churches; and
(n) Stewards Trust means any trust in respect of which the Stewards acts as trustee and “Stewards Trusts” means more than one such trust.
(2) Terms used in this decision that are defined in National Instrument 14-101 Definitions (NI 14-101), NI 45-106, NI 31-103 and MI 11-102 and not otherwise defined in this decision, shall have the same meaning as in NI 14-101, NI 45-106, NI 31-103, or MI 11-102 as applicable, unless the context otherwise requires.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a non-share corporation established in 1952 and is a “charitable organization” for the purposes of the Income Tax Act (Canada).
The Filer is restricted in the business it may carry on and the powers it may exercise to engaging exclusively in educational, charitable or religious activities. The Filer was established for the purpose of giving financial aid, primarily by way of mortgage financing, within the Stewards Community to borrowers that may otherwise be unable to obtain such financing from commercial lenders.
The Filer is a mortgage brokerage and mortgage administrator licensed under the Mortgage Brokers, Lenders and Administrators Act, 2006 (Ontario).
The business of the FiIer is overseen by its board of directors and the day-to-day management is under the direction of the Executive Director, who is independent from the board.
The head office of the Filer is located in Ontario.
Mortgage Lending Activities
The Filer’s Bond Program comprises capital raising and mortgage lending within the Stewards Community.
The Filer makes mortgage loans to Stewards Churches and others within the Stewards Community for charitable purposes, including building, renovating and repairing church and para-church buildings, facilities and similar undertakings. The Filer enters into all mortgage and related security documents as the lender and also manages and administers the associated mortgage loans.
In order to mitigate risk in the Bond Program, among other factors, the associated mortgage loans made by the Filer must:
(a) be secured by first mortgages on real property in a jurisdiction of Canada;
(b) have a commercial appraisal of land and buildings to cover market and fire sale liquidation values;
(c) not exceed 75% of the appraised value of the property;
(d) be insured under mortgage title insurance;
(e) for potential mortgages on existing buildings, be conditional on delivery of a satisfactory report from a professional engineer describing the building condition, including likely remaining life on electrical, plumbing, foundation, structure, HVAC and other critical building components;
(f) be conditional on delivery of a satisfactory Phase 1 environmental study of the property;
(g) in respect of the potential mortgagor, have sufficient (in the judgement of both management and a majority of the board of directors) prospective free cash flow to support the mortgage payments; and
(h) be supported by a unanimous resolution of the local church leadership at a duly called meeting or a similar threshold of approval for para-church borrowers in the Stewards Community.
The Filer has been operating the Bond Program for over 65 years.
Under current management of the Filer, there has been no mortgage enforcement action required or taken in respect of any mortgage loan advanced by the Filer and, to the knowledge of current management, no mortgage enforcement action has ever been taken over the history of the Bond Program.
Distribution of Bonds
In order to raise funds to advance by way of mortgage loans, the Filer issues Bonds to Bond Investors within the Stewards Community. The Filer uses the proceeds from Bond issuances to make the mortgage loans.
In a typical year, the Filer issues Bonds in an aggregate principal amount of approximately $2.5 million to between 25 and 40 purchasers.
As at the date of this decision, there were Bonds outstanding in the aggregate principal amount of $24.8 million.
No commission or other remuneration is paid by Bond Investors in connection with the sale of Bonds. The Filer will pay a fee to CSC for its services.
Under current management of the Filer, there has been no investor loss or investor complaint in respect of an investment in Bonds and, to the knowledge of current management, there has been no investor loss or investor complaint over the history of the Bond Program.
The Filer issues Bonds in reliance on prospectus exemptions set out in NI 45-106, traditionally relying on section 2.38 which provides an exemption for not-for-profit issuers distributing their own securities subject to certain conditions. The Filer has been informed by staff of the Canadian securities regulatory authorities that the Filer does not fit within the conditions of this exemption. Accordingly, the Filer has applied for the Ongoing Prospectus Exemption Sought as a basis for continuing to distribute Bonds.
Proposed Distribution of Bonds through CSC
The Filer has arranged to distribute the Bonds through CSC and may also distribute Bonds through other registered dealers.
The Filer acknowledges that CSC will not recommend, advise, or solicit a donation from any Bond Investor to Stewards or to any Stewards Charities.
Neither the Filer, nor any of its officers, directors, employees or any other individuals acting on behalf of the Filer, will receive any form of commission or transaction-based compensation related to the Bond Program.
Neither the Filer, nor any of its officers, directors, employees or any other individuals acting on behalf of the Filer, will pay or receive any referral fees in respect of their activities related to the Bond Program.
The Filer may promote the Bond Program primarily through its website and in church bulletins and similar publications within the Stewards Community. The Bond Program may also be promoted by CSC at certain Stewards events (at which the primary attendees are pastors and elders within the Stewards Community) and the Filer may attend to provide factual information on the Bond Program. All such advertising will include a prominent reference to the Offering Memorandum and to the CSC contact information for those interested in pursuing an investment in Bonds.
Terms and Attributes of the Bonds
The Bonds are unsecured variable rate redeemable debt securities of the Filer.
The Bonds do not have a maturity date. Instead, the Bonds are redeemable at the option of the Bond Investor.
Traditionally, Bonds were issued in principal amounts varying from $1,000 to several hundred thousand dollars. Under the Prior Decisions, the principal amount of Bonds was limited to $50,000, either in a single Bond or in the aggregate of all Bonds issued to a single Bond Investor. Following the date of this decision, the principal amount of Bonds issued in reliance on the Ongoing Prospectus Exemption Sought will be limited by the investment limits in condition (1)I.b of this decision, as applicable.
Interest on the Bonds is paid semi-annually.
The interest rate payable under the Bonds is normally determined based on semi-annual assessments of current competitive lending rates in the market and may vary based on when an investment in the Bonds is made. Frequency of assessments may be increased or decreased, as deemed necessary based on prevailing market conditions.
The Ongoing Prospectus Exemption Sought
Following the date of this decision, the Filer will only distribute Bonds to Bond Investors either in accordance with prospectus exemptions available under securities legislation or in accordance with the terms and conditions of this decision.
The Filer requires the Ongoing Prospectus Exemption Sought in order to modify certain terms and conditions of the OM Exemption to reflect the unique features of its distribution model and structure.
In particular, the Filer requires the Ongoing Prospectus Exemption Sought because CSC is registered in the category of restricted dealer and, therefore, does not meet the requirements of:
(a) subparagraph 2.9(2.1)(b)(iii) of NI 45-106 for purposes of determining whether the investment is suitable;
(b) subsection 2.9(5.2) of NI 45-106 for purposes of distributing OM marketing materials that have been approved in writing by the issuer; or
(c) various prescribed forms and applicable schedules, which are required under the conditions to the OM Exemption and, without the Ongoing Prospectus Exemption Sought, would not permit the Filer or CSC to include the category of restricted dealer in reference to registered firms when completing these forms and schedules.
- As a dealing representative of CSC is subject to the same proficiency requirements that a dealing representative of an exempt market dealer would be subject to under NI 31-103, a dealing representative of CSC is appropriately qualified to determine whether an investment above the $30,000 investment limit is suitable for the purposes of subparagraph 2.9(2.1)(b)(iii) of NI 45-106.
The Reporting Exemption Sought
The Filer requires the Reporting Exemption Sought in order to ease financial and administrative burden. Historically, the Filer has distributed the Bonds under prospectus exemptions that did not require a Form 45-106F1 to be filed. While the Filer has determined to limit the issuance of new Bonds to once monthly, the requirement to file a report of exempt distribution in Form 45-106F1 in accordance with Part 6 of NI 45-106 within 10 days of the date of the distribution would impose a considerable financial and administrative burden on the Filer as a not-for-profit organization.
The Reporting Exemption Sought will allow the Filer to pool the Bond distribution data on a monthly basis and prepare and file a single report for all Bond distributions made in the calendar month. This schedule of reporting will ease the financial and administrative burden on the Filer.
Additional Investor Protection Measures and Solvency Matters
In operating the Bond Program, the Filer follows strict guidelines for making investments in mortgage loans, as described above. Among other risks, the distribution model of the Bond Program requires the Filer to manage risks associated with the difference in the likely redemption profile of the Bonds, on the one hand, and the term to maturity of the mortgage loans (usually five years), on the other hand. Since Bonds are redeemable on demand, the exact cash required to fund future redemptions at any specific point in time is not known. However, the Filer keeps detailed records of historical annual redemption amounts as a percentage of total bonds outstanding.
In order to facilitate future redemptions, the Filer maintains cash and investments on hand sufficient to fund five years of redemptions at the prevailing average annual redemption rate. Five years is the term of the vast majority of the Filer’s mortgages. The redemption reserve maintained by the Filer will bridge the funding of redemptions at the historical redemption rate until the next mortgage matures, at which time the proceeds of repayment of the mortgage will provide cash to fund redemptions or replenish the reserve, as the case may be.
From time to time, the Filer’s current assets (e.g., mortgage loan repayments) may be lower than the value of the Filer’s current liabilities (e.g., projected average Bond redemption payments). The Filer addresses this risk by maintaining the redemption reserve described above.
In the event that the redemption reserve will or may be insufficient to repay the amounts due on redemption of the Bonds (for example, in the event of a spike in the redemption rate beyond the historical average), the Filer will instruct CSC to attempt to find new Bond Investors to purchase Bonds and, if CSC is successful, the Filer will use the proceeds from the new issue to replenish the redemption reserve.
The Offering Memorandum provided to each Bond Investor will describe the Filer’s activities and operation of the Bond Program, including its guidelines for making investments in mortgage loans. The Offering Memorandum will also describe, among other risk factors material to the Filer and the Bonds, the operating risks faced by the Filer due to the demand nature of the Bonds in relationship to the term of each mortgage, as described above.
Additional Information about the Filer
- Except for the matters described in representation 16 and the dealer registration requirement in certain Passport Jurisdictions, the Filer is not in default of securities legislation in any jurisdiction of Canada.
Decisions
The Principal Regulator is satisfied that these decisions meet the tests set out in the Legislation for the Principal Regulator to make these decisions.
The decisions of the Principal Regulator under the Legislation are:
(1) The Exemptions Sought are granted provided that all of the following conditions are met:
I. Stewards is distributing a Bond where:
a. the Bond Investor purchases the Bond as principal;
b. the acquisition cost of all securities acquired under the OM Exemption (or a decision of a securities regulatory authority that provides an exemption from the prospectus requirement that is substantially similar to the OM Exemption) in the preceding 12 months by a Bond Investor who is an individual does not exceed the following amounts:
i. in the case of a Bond Investor that is not an eligible investor, $10,000,
ii. in the case of a Bond Investor that is an eligible investor, $30,000,
iii. in the case of a Bond Investor that is an eligible investor and that received advice from a portfolio manager, investment dealer, exempt market dealer or CSC that the investment is suitable, $100,000;
c. at the same time or before the Bond Investor signs the agreement to purchase the Bond, Stewards:
i. delivers an offering memorandum to the Bond Investor in compliance with conditions VI to XIII, and
ii. obtains a signed risk acknowledgement from the Bond Investor in compliance with condition XV; and
d. the Bond distributed by Stewards is an unsecured variable rate redeemable debt security.
II. Stewards is not an investment fund.
III. The investment limits described in conditions I.b.ii and iii will not apply if the Bond Investor is:
a. an accredited investor; or
b. a person described in subsection 2.5(1) of NI 45-106 [Family, friends and business associates].
IV. Stewards is not distributing a short-term securitized product under the Bond Program.
V. No commission or finder’s fee is paid to any person.
VI. The offering memorandum delivered to Bond Investors must comply with the requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers, as may be amended from time to time, except that for purposes of Form 45-106F2 and the applicable schedules to Form 45-106F2, Stewards or CSC may include the category of restricted dealer where required.
VII. An offering memorandum delivered to a Bond Investor in reliance on this decision:
a. must incorporate by reference, by way of a statement in the offering memorandum, OM marketing materials related to each distribution under the offering memorandum and delivered or made reasonably available to a prospective Bond Investor before the termination of the distribution; and
b. is deemed to incorporate by reference OM marketing materials related to each distribution under the offering memorandum and delivered or made reasonably available to a prospective Bond Investor before the termination of the distribution.
VIII. A portfolio manager, investment dealer, exempt market dealer or CSC must not distribute OM marketing materials unless the OM marketing materials have been approved in writing by Stewards.
IX. An offering memorandum delivered under this decision must provide the Bond Investor with a contractual right to cancel the agreement to purchase the Bond by delivering a notice to Stewards not later than midnight on the 2nd business day after the Bond Investor signs the agreement to purchase the Bond.
X. The offering memorandum delivered under this decision must contain a contractual right of action against Stewards for rescission or damages that
a. is available to the Bond Investor if the offering memorandum, or any information or documents incorporated or deemed to be incorporated by reference into the offering memorandum, contains a misrepresentation, without regard to whether the Bond Investor relied on the misrepresentation;
b. is enforceable by the Bond Investor delivering a notice to Stewards;
i. in the case of an action for rescission, within 180 days after the Bond Investor signs the agreement to purchase the Bond; or
ii. in the case of an action for damages, before the earlier of
A. 180 days after the Bond Investor first has knowledge of the facts giving rise to the cause of action, or
B. 3 years after the date the Bond Investor signs the agreement to purchase the Bond,
c. is subject to the defence that the Bond Investor had knowledge of the misrepresentation;
d. in the case of an action for damages, provides that the amount recoverable
i. must not exceed the price at which the Bond was offered, and
ii. does not include all or any part of the damages that Stewards proves does not represent the depreciation in value of the Bond resulting from the misrepresentation, and
e. is in addition to, and does not detract from, any other right of the Bond Investor.
XI. An offering memorandum delivered under this decision must contain a certificate that states the following:
“This offering memorandum does not contain a misrepresentation.”
XII. The certificate required under condition XI of this decision must be signed
a. by Stewards’ chief executive officer and chief financial officer or, if Stewards does not have a chief executive officer or chief financial officer, an individual acting in that capacity; and
b. on behalf of the directors of Stewards, by
i. any two directors who are authorized to sign, other than the persons referred to in paragraph (a), or
ii. all the directors of Stewards.
XIII. A certificate under condition XI must be true
a. at the date the certificate is signed; and
b. at the date the offering memorandum is delivered to the Bond Investor.
XIV. If a certificate under condition XI ceases to be true after it is delivered to the Bond Investor, Stewards cannot accept an agreement to purchase the Bond from the Bond Investor unless
a. the Bond Investor receives an update of the offering memorandum;
b. the update of the offering memorandum contains a newly dated certificate signed in compliance with condition XII; and
c. the Bond Investor re-signs the agreement to purchase the Bond.
XV. A risk acknowledgement obtained under this decision must comply with the requirements of Form 45-106F4, including applicable schedules, except that for purposes of Form 45-106F4 and the applicable schedules to Form 45-106F4, Stewards or CSC may include the category of restricted dealer where required. Stewards must retain the signed risk acknowledgment for 8 years after the distribution.
XVI. Stewards must
a. hold in trust all consideration received from the Bond Investor in connection with a distribution of a Bond under this decision until midnight on the second business day after the Bond Investor signs the agreement to purchase the Bond; and
b. return all consideration to the Bond Investor promptly if the Bond Investor exercises the right to cancel the agreement to purchase the Bond described under condition IX.
XVII. Stewards must file a copy of an offering memorandum delivered under this decision and any update of a previously filed offering memorandum with the securities regulatory authority on or before the 10th day after the distribution under the offering memorandum or update of the offering memorandum.
XVIII. Stewards must file with the securities regulatory authority a copy of all OM marketing materials required or deemed to be incorporated by reference into an offering memorandum delivered under this decision,
a. if the OM marketing materials are prepared on or before the filing of the offering memorandum, concurrently with the filing of the offering memorandum; or
b. if the OM marketing materials are prepared after the filing of the offering memorandum, within 10 days of the OM marketing materials being delivered or made reasonably available to a prospective Bond Investor.
XIX. OM marketing materials filed under condition XVIII must include a cover page clearly identifying the offering memorandum to which they relate.
XX. For purposes of financial statement reporting, Stewards must comply with subsections 2.9(17.5), (17.7) to (17.13), (17.15) to (17.17) and (17.19) of the OM Exemption as if Stewards had distributed securities under the OM Exemption.
XXI. Stewards must make reasonably available to each holder of a Bond acquired under this decision a notice of each of the following events in accordance with Form 45-106F17, within 10 days of the occurrence of the event:
a. a discontinuation of Stewards’ business;
b. a change in Stewards’ industry;
c. a change of control of Stewards.
XXII. Stewards is required to make the disclosure required respectively by conditions XX (in respect of subsections 2.9(17.5) and (17.19) of the OM Exemption as referenced above) and XXI of this decision until the earlier of
a. the date Stewards becomes a reporting issuer in any jurisdiction of Canada; and
b. the date Stewards ceases to carry on business.
XXIII. In Ontario, Stewards is designated a market participant under the Securities Act (Ontario).
XXIV. For each distribution made in reliance on this decision, Stewards will file a completed Form 45-106F1 in accordance with Part 6 of NI 45-106, as may be amended from time to time, or within 10 days of the end of the calendar month in which the distribution occurred. For purposes of Form 45-106F1 and the applicable schedules to Form 45-106F1, Stewards or CSC may include the category of restricted dealer where required.
XXV. The first trade in securities distributed in reliance on this decision will be deemed to be a distribution that is subject to section 2.5 of National Instrument 45-102 Resale of Securities.
XXVI. The additional investor protection measures for the Bond Program described in representations 33 to 37 above must remain in effect as of the date of distribution.
XXVII. In the event of an amendment to subsection 2.9(2.1)(b) of NI 45-106, the same amendment is deemed to be made to condition I.b of this decision, provided that advice that an investment is suitable may be provided by a portfolio manager, investment dealer, exempt market dealer or CSC.
(2) Stewards will only distribute Bonds in a jurisdiction through a dealer that is appropriately registered in the jurisdiction.
(3) This decision will expire upon the date that is five years from the date of this decision.
“Grant Vingoe” “Heather Zordel”
Vice-Chair Commissioner
Ontario Securities Commission Ontario Securities Commission