In a recent Staff Notice, the Ontario Securities Commission clarified that a mortgage investment entity (MIE) is not a non-redeemable investment fund if it invests in mortgages in the following manner:
- the issuer proposes to invest all or substantially all of its assets in a pool of mortgages;
- the mortgages purchased by the MIE are originated and serviced by one or more mortgage originators (each, an Originator);
- the Originator may use the MIE as a source of funding for the Originator’s mortgage lending business.
According to OSC Staff, regardless of whether the Originator is the MIE’s manager, an MIE with the above attributes is, in essence, an operating lending business, not an investment fund. Therefore, these MIEs may not file an initial prospectus using Form 41-101F2 Information Required in an Investment Fund Prospectus, as that form is designed to provide disclosure regarding a passively held portfolio.
Instead, these MIEs are required to use Form 41-101F1 Information Required in a Prospectus (Form 41-101F1). Information regarding the Originator’s business and how it decides what mortgages to originate and how to service them is considered to be material information to be disclosed using Form 41-101F1. The role played by the Originator in the public offering and its relationship to the MIE will be carefully scrutinized by the regulator.