Securities Law & Instruments

Headnote

National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- relief from prospectus requirements to allow U.S. company to spin off shares of shares in a partially owned company it invested assets in to investors by way of distribution in specie -- distribution not covered by legislative exemptions -- both companies public in the U.S. but are not a reporting issuers in Canada -- U.S. parent company has a de minimis presence in Canada. No investment decision required from the Canadian Shareholders in order to receive shares from distribution

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., s. 53.

March 15, 2013

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
EACH OF THE PROVINCES AND TERRITORIES OF CANADA
(TOGETHER, THE JURISDICTIONS)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
TWO HARBORS INVESTMENT CORP.
(THE FILER)
DECISION

Background

The principal regulator in the Province of Ontario has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the prospectus requirements contained in the Legislation in connection with the distribution by the Filer of shares of common stock of Silver Bay Realty Trust Corp. (Silver Bay), a United States publicly traded corporation, on a pro rata basis and by way of a dividend in specie, to the Filer's shareholders (the 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; 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 the other provinces and territories of Canada.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer.

1. The Filer is a Maryland corporation focused on investing in, financing and managing residential mortgage-backed securities, residential mortgage loans and other financial assets, and operates as a real estate investment trust (REIT) as defined under the United States Internal Revenue Code of 1986, as amended. The Filer was incorporated on May 21, 2009 and commenced operations as a U.S. publicly traded company on October 28, 2009. The Filer's corporate headquarters are located at 601 Carlson Parkway, Suite 1400, Minnetonka, Minnesota, 55305, U.S.A.

2. The Filer is externally managed and advised by PRCM Advisers LLC, a wholly-owned subsidiary of Pine River Capital Management L.P. (Pine River), such management including the provision of property acquisition and property management services with respect to the Portfolio Properties (as defined in paragraph 15 below) through an affiliate.

3. The Filer is not a reporting issuer under the securities laws of any province or territory of Canada. The Filer has no intention of becoming a reporting issuer under the securities laws of any province or territory of Canada.

4. The Filer's common stock (the Filer Shares) are listed on the New York Stock Exchange (NYSE) under the symbol "TWO", and the Filer's warrants are listed on the NYSE Amex under the symbol "TWO.WS". The Filer Shares are not listed on any Canadian stock exchange and the Filer has no intention of listing its securities on any stock exchange in Canada.

5. Pursuant to a geographical breakdown report that the Filer received from its transfer agent, as at December 31, 2012, there were two holders of record of the Filer Shares resident in Canada holding 149 Filer Shares (one in Ontario holding 136 shares and one in British Columbia holding 13 shares), representing approximately 1.3% of the registered shareholders of the Filer worldwide and approximately 0.00005% of the outstanding Filer Shares.

6. Pursuant to a geographical survey report that the Filer received from Broadridge Financial Solutions, Inc., as at January 7, 2013, there were 2,209 beneficial holders of Filer Shares resident in Canada holding approximately 2,568,206 Filer Shares, representing approximately 2.2% of the beneficial shareholders of the Filer worldwide and approximately 0.9% of the outstanding Filer Shares.

7. As per the information above, the number of registered and beneficial shareholders of the Filer resident in Canada (collectively, the Canadian Shareholders), and the proportion of Filer Shares held by such shareholders, is de minimis.

8. The Filer is not in default of securities legislation in any of the provinces or territories of Canada.

9. Silver Bay is a Maryland corporation formed in 2012 that is focused on the acquisition, renovation, leasing and management of single-family properties in certain desirable markets in the United States, which intends to elect and qualify to be taxed as a REIT for U.S. federal tax purposes. Silver Bay's corporate headquarters are located at 601 Carlson Parkway, Suite 250, Minnetonka, Minnesota, 55305, U.S.A.

10. Silver Bay is externally managed by PRCM Real Estate Advisers LLC, a joint venture between an affiliate of Pine River and Provident Real Estate Advisors LLC (Provident).

11. Silver Bay completed its initial public offering in the United States on December 19, 2012 (the IPO).

12. Silver Bay is not a reporting issuer under the securities laws of any province or territory of Canada. To the knowledge of the Filer, Silver Bay has no intention of becoming a reporting issuer under the securities laws of any province or territory of Canada.

13. Silver Bay's common stock is listed on the NYSE under the symbol "SBY". Silver Bay's common stock is not listed on any Canadian stock exchange and, to the knowledge of the Filer, Silver Bay has no intention of listing its securities on any stock exchange in Canada.

14. To the knowledge of the Filer, Silver Bay is not in default of securities legislation in any of the provinces or territories of Canada.

15. Concurrently with the closing of its IPO, Silver Bay completed certain formation transactions pursuant to which it acquired an initial portfolio of more than 3,300 single-family properties. As part of such transactions, the Filer and Silver Bay had entered into a contribution agreement (the Contribution Agreement) pursuant to which the Filer contributed its existing portfolio of over 2,200 single-family properties (the Portfolio Properties) to Silver Bay together with US$50 million in cash that was used to acquire and renovate properties through the closing of the transaction (together, the Filer Contribution). Entities managed by Provident also contributed approximately 880 single-family residential properties to Silver Bay in connection with the formation transactions.

16. Prior to the closing of its IPO, Silver Bay had no substantive operations. Silver Bay was created in part in order for the Filer to contribute its single-family Portfolio Properties, together with the contributed single-family properties managed by Provident, into a new stand-alone REIT focused on the acquisition, renovation, leasing and management of single-family properties.

17. In consideration for the Filer Contribution, the Filer received 17,824,647 shares of common stock of Silver Bay (the Silver Bay Consideration Shares) issued from treasury, which represent approximately 45.3% of the issued and outstanding Silver Bay common stock.

18. The Filer intends to distribute all or a portion of the Silver Bay Consideration Shares (the Special Distribution), on a pro rata basis and by way of a special dividend in specie, to the shareholders of the Filer (the Filer Shareholders) as of a record date which is expected to occur on or about April 2, 2013.

19. The Filer Shareholders will not be required to pay for Silver Bay Consideration Shares received in the Special Distribution or to surrender or exchange their Filer Shares or take any other action in order to be entitled to receive the Special Distribution shares. The Special Distribution will not cancel or affect the number of outstanding Filer Shares and the Filer Shareholders will retain their Filer Share stock certificates, if any. The Special Distribution will occur automatically and without any investment decision on the part of the Filer Shareholders. Neither the Filer Contribution nor the Special Distribution require the Filer Shareholders' approval under United States law.

20. No fractional Silver Bay Consideration Shares will be distributed as part of the Special Distribution. Instead, as soon as practicable after the Special Distribution, the distribution agent will aggregate all fractional shares into whole shares of Silver Bay common stock, sell such shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of these sales pro rata to each shareholder who otherwise would have been entitled to receive a fractional share in the Special Distribution.

21. As per a registration rights agreement entered into in connection with the Contribution Agreement, Silver Bay has prepared and filed with the United States Securities and Exchange Commission (the SEC) a Form S-11 Registration Statement (as may be subsequently amended, restated and supplemented, the Registration Statement) under the United States Securities Act of 1933, with respect to the Silver Bay Consideration Shares.

22. The prospectus in the Registration Statement was prepared in accordance with the U.S. federal securities law. The Registration Statement was initially filed with the SEC on March 1, 2013 and was declared effective by the SEC as of March 13, 2013. The exact number of Silver Bay Consideration Shares that the Filer shall distribute, the distribution ratio and the record date for the Special Distribution will be disclosed by the Filer by way of news release.

23. All materials relating to the Special Distribution sent by or on behalf of the Filer or Silver Bay to the Filer Shareholders resident in the United States will be sent concurrently to the Canadian Shareholders.

24. The Canadian Shareholders who receive Silver Bay Consideration Shares pursuant to the Special Distribution will have the benefit of the same rights and remedies in respect of the disclosure documentation received in connection with the Special Distribution that are available to the Filer Shareholders resident in the United States.

25. Following the completion of the Special Distribution, the Canadian Shareholders who receive Silver Bay Consideration Shares pursuant to the Special Distribution, to the extent they continue to hold such shares, will be treated as any other shareholder of Silver Bay and will be concurrently sent the same disclosure materials required to be sent under applicable U.S. laws that Silver Bay sends to holders of its common stock in the United States.

26. The Special Distribution to Canadian Shareholders would be exempt from the prospectus requirements pursuant to subsection 2.31(2) of National Instrument 45-106 -- Prospectus and Registration Exemptions but for the fact that Silver Bay is not a reporting issuer under the Legislation.

27. In the absence of the Exemption Sought, qualification by prospectus of the Silver Bay Consideration Shares to Canadian Shareholders pursuant to the Special Distribution is not practicable, requiring that Canadian Shareholders be excluded from receiving the Special Distribution.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the first trade in Silver Bay Consideration Shares acquired pursuant to the Special Distribution will be deemed to be a distribution unless the conditions in section 2.6 or subsection 2.14(1) of National Instrument 45-102 Resale of Securities are satisfied.

"Paulette L. Kennedy"
Ontario Securities Commission
 
"Edward P. Kerwin"
Ontario Securities Commission