Securities Law & Instruments

Headnote

Application by a TSX- and NASDAQ-listed issuer and offshore purchaser for exemptive relief in relation to a proposed distribution of securities by the issuer by way of an "equity line of credit" -- an equity line of credit is an agreement with a public company under which a purchaser makes a commitment at signing to purchase a specified dollar amount of securities on terms that enable the company to determine the timing and dollar amount of securities the purchaser will receive -- the company has the right, but not the obligation, to sell the securities which are the subject of the equity line to the purchaser, up to a specified maximum dollar amount, in a series of draw downs over a specified period of time -- purchaser purchases at a predetermined percentage discount (the "discount to market") from the volume weighted average price of the company's securities over a period of trading days -- as a result of the discount to market and the delayed nature of the purchase, the purchaser has strong economic incentive simultaneously to resell (or sell short, or otherwise hedge) the securities which are the subject of a draw down to convert the discount to cash and to reduce as much as possible investment risk -- purchaser may be considered to be acting as an "underwriter" -- a draw down under an equity line of credit may be considered to be an indirect distribution of securities by the company to purchasers in the secondary market through the equity line purchaser acting as underwriter -- in the present application, resales by the purchaser will generally be made in the U.S.; however, short sale and hedging transactions may involve, directly or indirectly, trades in Canada -- relief granted to the issuer and purchaser from certain registration, prospectus and prospectus form requirements, subject to terms and conditions, including a 10% restriction on the number of securities that may be distributed under an equity line

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 1(1) (definition of "distribution" and "underwriter"), 25(1)(a), 59(1), 71(1), 74(1), 147.

Applicable Ontario Rules

National Instrument 44-101 Short Form Prospectus Distributions.

National Instrument 44-102 Shelf Distributions .

National Instrument 71-101 The Multijurisdictional Disclosure System .

October 12, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN AND ONTARIO

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

ENTERRA ENERGY TRUST

AND

IN THE MATTER OF

KINGSBRIDGE CAPITAL LIMITED

 

MRRS DECISION DOCUMENT

Background

1. The local securities regulatory authority or regulator (the Decision Maker) in each of Alberta, Saskatchewan and Ontario (the Jurisdictions) has received an application from Enterra Energy Trust (Enterra) and Kingsbridge Capital Limited (Kingsbridge) in connection with secondary offerings (Secondary Offerings) by Kingsbridge into the United States of America (the US) of trust units (Trust Units) of Enterra to be purchased by Kingsbridge pursuant to an equity drawdown facility (the Facility) for a decision under the securities legislation of the Jurisdictions (the Legislation) that:

1.1 the requirement under the Legislation that Kingsbridge and its directors, officers and certain of its employees be registered under the Legislation to conduct underwriting activities (the Registration Requirement) does not apply to Kingsbridge or its directors, officers or employees with respect to the Secondary Offerings;

1.2 the requirement under the Legislation that the short form base shelf prospectus (the Prospectus) to be filed by Enterra include a certificate executed by Kingsbridge as underwriter (the Underwriter Certificate Requirement) does not apply with respect to the Secondary Offerings;

1.3 the requirement under the Legislation that the Prospectus include the disclosure specified by item 6.3 Determination of Price of Form 44-101F3 Short Form Prospectus (the Prospectus Form Requirement) does not apply in respect of the pricing of the Secondary Offerings;

1.4 the requirement under the Legislation that Kingsbridge send or deliver to a purchaser of a security, within two business days of a sale, the latest prospectus and any amendment (the Prospectus Delivery Requirement) does not apply to Kingsbridge or to dealers through which Kingsbridge sells the Trust Units in the US in the Secondary Offerings; and

1.5 the right of a purchaser under the Legislation to withdraw from a purchase of a security within two business days after receipt by the purchaser of the Prospectus or any amendment (the Withdrawal Right) does not apply to a purchaser under a Secondary Offering.

2. Under the Mutual Reliance Review System for Exemptive Relief Applications (the System), the Alberta Securities Commission is the principal regulator for this application.

3. Under the System, this MRRS Decision Document evidences the decision of each Decision Maker (the Decision).

Interpretation

4. Unless otherwise defined, the terms herein have the meaning set out in National Instrument 14-101 Definitions.

Representations and Statements

5. Enterra makes the following representations to the Decision Makers:

5.1 Enterra is an open-ended unincorporated investment trust created by a trust indenture governed by the laws of Alberta with its head and principal office in Calgary, Alberta.

5.2 Enterra is a reporting issuer under the securities legislation of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia.

5.3 The Trust Units trade on the Toronto Stock Exchange and the NASDAQ National Market.

5.4 Enterra, in its sole discretion, determines how many Trust Units to sell under the Facility within specified minimum and maximum dollar amounts for each drawdown. The price at which Kingsbridge purchases Trust Units in a particular drawdown under the Facility is determined by applying a pre-determined percentage discount to the fifteen day volume-weighted average trading price of the Trust Units on the NASDAQ National Market (or other US exchange on which the Trust Units trade at the time) subject to Toronto Stock Exchange minimum pricing rules. The number of Trust Units in a particular drawdown is determined accordingly.

5.5 The number of Trust Units issuable in any 12-month period under one or more equity lines of credit, including the Facility, will not exceed 3,440,800.

5.6 Enterra will provide a copy of each Drawdown Notice to the Toronto Stock Exchange and, if requested to do so, to the Decision Makers, prior to or immediately upon its issuance.

5.7 Immediately following the closing of a drawdown under the Agreement, Enterra will issue a news release (i) announcing the closing of the drawdown, and (ii) stating that the Prospectus is available on the System for Electronic Document Analysis and Retrieval (SEDAR) and the EDGAR website of the US Securities and Exchange Commission (SEC).

5.8 Enterra intends to file the Prospectus with the securities commissions of British Columbia, Alberta, Saskatchewan and Ontario. The Prospectus will qualify, among other potential offerings, the Secondary Offerings.

5.9 The Prospectus will be prepared in accordance with the requirements of National Instrument 44-102 Shelf Distributions, as varied by the relief granted in this Decision.

5.10 Enterra and Enterra Energy Corp. (Corp) will provide to each purchaser in a Secondary Offering:

5.10.1 a contractual right of action for damages exercisable against Enterra, Corp, every director of Corp. as at the date of the Prospectus, and every other person who signs the Prospectus; and

5.10.2 a contractual right of rescission excerciseable against Enterra, on the same terms (including defences and limitations) as the right of rescission that would be provided under the Legislation to a purchaser of Trust Units directly from Enterra.

5.11 The Prospectus will disclose in plain language (the Disclosure): (i) that any sales of Trust Units acquired by Kingsbridge under the Facility, including any delivery of Trust Units to satisfy any short sales or similar hedging strategies will be made pursuant to the Prospectus; (ii) the contractual rights described in paragraph 5.10; (iii) that Secondary Offering purchasers of Trust Units will not be entitled to any rights of withdrawal under the Legislation; (iv) that Kingsbridge is considered to be an underwriter as such term is defined under applicable Canadian and US securities laws; (v) that Kingsbridge will have liability as an underwriter under US federal securities laws; and (vi) the relief, provided by this Decision, from the Registration Requirement and the Underwriter Certificate Requirement.

5.12 Enterra intends to file, pursuant to the multijurisdictional disclosure system (MJDS), a registration statement on Form F-10 (the Registration Statement) with the SEC that includes the Prospectus as modified in accordance with the MJDS rules (the US Prospectus).

6. Kingsbridge makes the following representations to the Decision Makers:

6.1 Kingsbridge is a corporation organized and existing under the laws of the British Virgin Islands with its head and principal office in Tortola, British Virgin Islands.

6.2 Kingsbridge has been established to, among other things, purchase and sell, as principal, securities of public companies including, without limitation, the purchase of equity securities pursuant to equity drawdown facilities.

6.3 Kingsbridge is not a registrant under the securities legislation of any province or territory of Canada or under securities legislation in the US.

7. Enterra and Kingsbridge jointly make the following representations to the Decision Makers:

7.1 Enterra and Kingsbridge have entered into a Trust Unit Purchase Agreement (the Agreement) governing the Facility, under which:

7.1.1 Kingsbridge has committed to purchase up to US$100,000,000 of Trust Units in a series of drawdowns over a 24-month period; and

7.1.2 Enterra has the right, but not the obligation, to sell the Trust Units to Kingsbridge, up to a specified maximum drawdown amount, in a series of drawdowns over that 24-month period.

7.2 When Enterra gives Kingsbridge notice that it intends to make a drawdown under the Facility (a Drawdown Notice), Kingsbridge is obligated to purchase from Enterra the dollar amount of Trust Units specified in the Drawdown Notice at the Discounted Price. The first drawdown is to be up to US$25,000,000. Each subsequent drawdown can be in a dollar amount up to the lesser of (i) 4% of Enterra's market capitalization as defined in the Agreement and (ii) US$25,000,000. There will be at least 20 consecutive trading days between each drawdown.

8. Kingsbridge seeks relief from the Registration Requirements in respect of the Secondary Offerings because it will sell Trust Units acquired by it under the Facility over an exchange outside Canada and will have no direct contract with purchasers.

9. Kingsbridge seeks relief from the Underwriter Certificate Requirement because Kingsbridge will not be acting as a conventional underwriter with respect to the Facility.

10. Kingsbridge seeks relief from the Prospectus Delivery Requirement in respect of the Secondary Offerings, on its own behalf and on behalf of dealers through which it sells the Trust Units in the US pursuant to the Registration Statement, because they will not necessarily know the identity of the ultimate purchasers of Trust Units sold in market transactions.

11. Enterra and Kingsbridge seek relief from the Prospectus Form Requirement in respect of the Secondary Offerings because the price at which Kingsbridge will sell Trust Units in Secondary Offerings is presently unknown but will be determined between Kingsbridge and each purchaser of Trust Units either directly or by reference to then-prevailing market prices.

Decision

12. Each of the Decision Makers is satisfied that the tests contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met.

13. The Decision of the Decision Makers under the Legislation is that:

13.1 the Registration Requirement does not apply to Kingsbridge or to its directors, officers or employees in respect of Secondary Offerings of Trust Units purchased by Kingsbridge under the Agreement;

13.2 the Underwriter Certificate Requirement and the Prospectus Form Requirement do not apply to the Prospectus with respect to Secondary Offerings;

13.3 the Prospectus Delivery Requirement does not apply to Secondary Offerings; and

13.4 Withdrawtal Rights do not apply to Secondary Offerings;

for so long as all of the representations in paragraphs 5.5, 5.6, 5.7, 5.10 and 5.11 remain true and provided that:

13.5 Kingsbridge complies with US federal securities laws applicable to the Secondary Offerings; and

13.6 upon request of a Decision Maker, Kingsbridge provides full particulars of trading and hedging activities, by Kingsbridge or by its associates, affiliates or insiders, relating to securities of Enterra.

"Glenda A. Campbell", Q.C.
Vice-Chair
Alberta Securities Commission
 
"Stephen R. Murison"
Vice-Chair
Alberta Securities Commission