Securities Law & Instruments

Headnote

Subsections 144(1) and 74(1) - certain non-redeemableinvestment funds not accredited investors within meaning ofRule 45-501 because not all unit holders accredited investors- certain unit holders acquired fund units under employee exemptionin Rule 45-503 - trades in portfolio securities by funds previouslygranted exemption from registration and prospectus exemptions- order revoked and replaced by ruling which also permits fundsto acquire portfolio securities through nominee companies -first trade of portfolio securities acquired by funds deemedto be a distribution unless conditions of section 2.5 of MI45-102 satisfied

Statute Cited

Securities Act, R.S.O. 1990, c. S.5, as am.,ss. 25, 53, 74(1), 144(1).

Rules Cited

Commission Rule 45-501 Exempt Distributions(2001), 24 OSCB 5549.

Commission Rule 45-503 Trades to Employees,Executives and Consultants (1998) 22 OSCB 117.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S.5,AS AMENDED (the "Act")

AND

IN THE MATTER OF

EDGESTONE CAPITAL MEZZANINEFUND II, L.P.

AND

IN THE MATTER OF

EDGESTONE CAPITAL VENTUREFUND, L.P.

AND

IN THE MATTER OF

EDGESTONE CAPITAL EQUITY FUNDII-A, L.P. AND

EDGESTONE CAPITAL EQUITY FUNDII-B, L.P.

 

ORDER AND RULING

(Subsections 144(1) and 74(1))

WHEREAS on August 30, 2002, the OntarioSecurities Commission made a ruling (the "Original Ruling")that that the acquisition of portfolio securities by each ofEdgeStone Capital Mezzanine Fund II, L.P. (the "MezzanineFund"), EdgeStone Capital Venture Fund, L.P. (the "VentureFund"), EdgeStone Capital Equity Fund II-A, L.P. ("EquityFund II-A") and EdgeStone Capital Equity Fund II-B, L.P.("Equity Fund II-B") (hereinafter Equity Fund II-Aand Equity Fund II-B collectively referred to as "EquityFund II" and each of the Mezzanine Fund, the Venture Fundand Equity Fund II collectively referred to as the "Funds")will not be subject to sections 25 and 53 of the Act;

AND WHEREAS the Funds wish to amend theOriginal Ruling in order to:

(a) permit the Funds to acquire portfoliosecurities through nominee companies that are wholly-ownedby the general partner of each Fund, and

(b) provide resale restrictions so that,in certain circumstances, portfolio securities acquiredby the Funds or their respective nominee companies not besubject to sections 25 and 53 of the Act;

AND WHEREAS in order to so amend theOriginal Ruling, the Funds have applied to revoke the OriginalRuling and to restate it as set out below;

AND UPON considering the applicationand the recommendation of staff of the Commission;

AND UPON each of the Funds having representedto the Commission that:

Mezzanine Fund

1. The Mezzanine Fund is a limited partnershipformed on December 19, 2000 by the filing of a declarationunder the Limited Partnerships Act (Ontario) and pursuantto an amended and restated limited partnership agreement datedOctober 31, 2001 (the "Mezzanine Fund Partnership Agreement").

2. EdgeStone Capital Mezzanine II Partners,Inc., a corporation existing under the laws of Canada, isthe general partner of the Mezzanine Fund (the "MezzanineFund General Partner").

3. The Mezzanine Fund is not a reporting issuerin the Province of Ontario or in any other Canadian jurisdictionand has no intention of becoming a reporting issuer in thefuture.

4. The principal place of business of theMezzanine Fund and the registered office of the MezzanineFund General Partner are in Toronto, Ontario.

5. The investment objectives of the MezzanineFund are to invest primarily in subordinated debt instrumentsof mid-market private and public Canadian companies.

6. Pursuant to the terms of the MezzanineFund Partnership Agreement, the Mezzanine Fund is authorizedto issue units ("Mezzanine Fund Units") which arenon-redeemable and subject to restrictions on transfer containedin the Mezzanine Fund Partnership Agreement.

7. Mezzanine Fund Units were offered undera confidential offering memorandum dated December 2000.

8. Other than the Employees (as defined below),each of the limited partners of the Mezzanine Fund is an "accreditedinvestor" within the meaning of OSC Rule 45-501 ExemptDistributions ("OSC Rule 45-501").

9. The Mezzanine Fund acquires and may inthe future acquire securities of portfolio companies throughnominee companies (each a "Mezzanine Fund Nominee").The sole shareholder of each Mezzanine Fund Nominee is orwill be the Mezzanine Fund GP.

Venture Fund

10. The Venture Fund is a limited partnershipformed on December 15, 2000 by the filing of a declarationunder the Limited Partnerships Act (Ontario) and pursuantto an amended and restated limited partnership agreement datedOctober 31, 2001 (the "Venture Fund Partnership Agreement").

11. EdgeStone Capital Venture Partners, Inc.,a corporation existing under the laws of Canada, is the generalpartner of the Venture Fund (the "Venture Fund GeneralPartner").

12. The Venture Fund is not a reporting issuerin the Province of Ontario or in any other Canadian jurisdictionand has no intention of becoming a reporting issuer in thefuture.

13. The principal place of business of theVenture Fund and the registered office of the Venture FundGeneral Partner are in Toronto, Ontario.

14. The investment objectives of the VentureFund are to invest primarily in equity and equity relatedsecurities of early stage technology companies carrying onbusiness in any of the communications sector, the informationtechnology sector, the applied technology sector, the networkinfrastructure sector, the wireless technology sector or theinternet-based sector.

15. Pursuant to the terms of the Venture FundPartnership Agreement, the Venture Fund is authorized to issueunits ("Venture Fund Units") which are non-redeemableand subject to restrictions on transfer contained in the VentureFund Partnership Agreement.

16. Venture Fund Units were offered undera confidential offering memorandum dated December 2000.

17. Other than the Employees, each of thelimited partners of the Venture Fund is an "accreditedinvestor" within the meaning of OSC Rule 45-501.

18. The Venture Fund acquires and may in thefuture acquire securities of portfolio companies through nomineecompanies (each a "Venture Fund Nominee"). The soleshareholder of each Venture Fund Nominee is or will be theVenture Fund GP.

Equity Fund II

19. Equity Fund II comprises two limited partnerships:Equity Fund II-A and Equity Fund II-B. Equity Fund II-A isa limited partnership formed on June 20, 2002 by the filingof a declaration under the Limited Partnerships Act(Ontario) and pursuant to a limited partnership agreementdated June 20, 2002 (the "Equity Fund II-A PartnershipAgreement"). Equity Fund II-B is a limited partnershipformed on January 9, 2002 by the filing of a declaration underthe Limited Partnerships Act (Ontario) and pursuantto an amended and restated limited partnership agreement datedJune 20, 2002 (the "Equity Fund II-B Partnership Agreement").

20. EdgeStone Capital Equity Fund II-A GP,L.P., a limited partnership existing under the laws of Ontario,is the general partner of Equity Fund II-A (the "EquityFund II-A General Partner"). EdgeStone Capital EquityFund II-B GP, Inc., a corporation existing under the lawsof Canada, is the general partner of Equity Fund II-B (the"Equity Fund II-B General Partner").

21. Neither of Equity Fund II-A nor EquityFund II-B is a reporting issuer in the Province of Ontarioor in any other Canadian jurisdiction and neither has anyintention of becoming a reporting issuer in the future.

22. The principal place of business of EquityFund II and the registered office of the Equity Fund II-AGeneral Partner and the Equity Fund II-B General Partner (collectively,the "Equity Fund II General Partner") are in Toronto,Ontario.

23. The investment objectives of Equity FundII are to invest primarily in equity and equity related securitiesof mid-market North American companies (with Equity Fund II-Afocusing primarily on Canadian-based companies and EquityFund II-B focusing primarily on North American companies generally).

24. Pursuant to the terms of the Equity FundII-A Partnership Agreement and the Equity Fund II-B PartnershipAgreement (collectively, the "Equity Fund II PartnershipAgreements"), each of Equity Fund II-A and Equity FundII-B is authorized to issue units (collectively, "EquityFund II Units") which are non-redeemable and subjectto restrictions on transfer contained in the Equity Fund IIPartnership Agreements.

25. Equity Fund II Units are currently beingoffered for sale under a confidential offering memorandumdated July 2000. An initial closing of Units of Equity FundII-B occurred on January 9, 2002 and a subsequent closingof Units of Equity Fund II-A and Equity Fund II-B occurredon June 20, 2002.

26. Other than the Employees, each of thelimited partners of Equity Fund II is an "accreditedinvestor" within the meaning of OSC Rule 45-501.

27. Equity Fund II intends to acquire securitiesof portfolio companies through nominee companies (each an"Equity Fund II Nominee"). The sole shareholderof each Equity Fund II Nominee will be EdgeStone Capital EquityFund II GP, L.P.

General

28. Andrew Claerhout, Romeo Leemrijse, ZaheedPoptia, Stephanie Craig and Mike Forzley (collectively, the"Employees") are employees of an affiliate of eachof the Mezzanine Fund General Partner, the Venture Fund GeneralPartner and the Equity II General Partner. The Employees holdlimited partnership units in each of the Funds but are not"accredited investors" as defined in OSC Rule 45-501.Each of the Employees acquired their limited partnership unitsunder an exemption in Ontario Securities Commission Rule 45-503Trades to Employees, Executives and Consultants.

29. Each of the Mezzanine Fund Nominees, theVenture Fund Nominees and the Equity Fund II Nominees (collectively,the "Nominee Companies") acquires or will acquiresecurities of portfolio companies for and on behalf of theMezzanine Fund, the Venture Fund and the Equity Fund II, respectively.Each of the Nominee Companies has entered, or will enter,into a declaration of trust with the relevant Fund pursuantto which the relevant Nominee Company has agreed to hold allof its right, title and interest in and to any securitiesof portfolio companies acquired by the Nominee Company forand on behalf of the relevant Fund.

30. Since the Funds, through the Nominee Companies,intend to invest in securities of issuers that are generallynot listed or traded on a public market, the investment activitiesby the Funds will be limited to acquiring securities on aprivate placement basis for which an exemption from sections25 and 53 of the Act is available.

31. The only exemption from Sections 25 and53 of the Act available to the Funds for purposes of theirinvestment acquisitions is the accredited investor exemptionin section 2.3 of OSC Rule 45-501. However, because the Employeesare not "accredited investors", the Funds will beunable to invest in equity and equity related securities or,in the case of the Mezzanine Fund, in subordinated debt instruments,on an exempt basis or to fulfil their respective purposes.

32. Any future trades in securities of theFunds will be made by persons or companies that are "accreditedinvestors" under OSC Rule 45-501 at the time such tradeis made.

UPON the Commission being satisfied thatto do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to subsection144(1) of the Act, that the Original Ruling be revoked;

AND IT IS RULED, pursuant to subsection74(1) of the Act, that trades to the Funds (or to Nominee Companiesinvesting for and on behalf of the Funds) in securities of portfoliocompanies will not be subject to sections 25 and 53 of the Act,provided that the first trade in such securities will be a distributionunless the provisions of subsections 2.5(2) or 2.5(3) of MultilateralInstrument 45-102 Resale of Securities are satisfied.

November 5, 2002.

"Paul M. Moore"                    "MaryTheresa McLeod"