NP 11-203 as applicable -- Approval granted under section 5.5(1)(d) of NI 81-102 to suspend redemptions to allow for the orderly wind-up and termination of the Fund -Approval expires on June 30, 2011 -- Manager to comply with notice requirements in NI 81-102 regarding Fund's termination -- Approval subject to specific representations and conditions -- Not a precedent because based on specific facts.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(d), 19.1.
November 30, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
GATEHOUSE CAPITAL INC.
IN THE MATTER OF
TIS PRESERVATION & GROWTH FUND
(the Fund) (together with the Manager, the Filers)
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval (the Requested Approval) pursuant to section 5.5(1)(d) of National Instrument 81-102 Mutual Funds (NI 81-102) to suspend redemptions of units of the Fund (Suspension of Redemptions).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the 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 provinces of Canada other than Québec and Ontario.
Terms defined in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Fund and the Manager:
1. The Fund is an open-end mutual fund trust that was established under the laws of the Province of Ontario pursuant to a trust agreement dated as of March 30, 2007 (the Trust Agreement) between the Manager and HSBC Trust Company (Canada) as trustee. The Manager assumed trusteeship duties of the Fund on January 15, 2010. Units of the Fund were last distributed in each province of Canada (except Québec) under a simplified prospectus and annual information form dated April 19, 2010, prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure and NI 81-102. The distribution of units of the Fund was suspended effective May 25, 2010, as discussed below.
2. The Fund is in default of securities legislation for failing to comply with the illiquid asset restrictions set out in section 2.4 of NI 81-102. Please see paragraph 9 below for further details regarding the nature of the default.
3. SciVest Capital Management Inc. is the investment advisor to the Fund. TIS Group Inc. has been appointed as the investment sub-advisor to the Fund.
4. As of November 23, 2010, the closing net asset value of the Fund was $5.53 per unit of the Fund and the total assets of the Fund amounted to $2,825,285.47.
5. The Fund pays management fees at an annual rate of 2.25% per annum of the net asset value of the class A units and 1.25% per annum of the net asset value of the class F units of the Fund (the Management Fees). The Management Fees are calculated and accrued daily based on the average net asset value of that series of units of the Fund and is paid on the last day of each month.
6. The unitholders of the Fund are not subject to deferred sales charges.
7. The Manager was incorporated on August 11, 2004 pursuant to the Business Corporations Act (Ontario). In December 2009, the Manager experienced a change of control, whereby the Manager is now a wholly-owned subsidiary of Redwood Asset Management Inc. The head office of the Manager is located in Toronto, Ontario.
8. The Manager is responsible for the management and the day-to-day operations of the Fund and is also the trustee of the Fund.
Alebra Technologies Inc.
9. On December 21, 2007, in a private placement, the Fund acquired preferred shares of Alebra Technologies Inc. (Alebra), a private company representing at the date of acquisition 8.39% of the Fund's net assets at that time. Since that time, the size of this position in the illiquid preferred shares of Alebra has increased as a percentage of the Fund's net assets, largely as a result of the diminution in value of other assets of the Fund. By the end of 2008, the preferred shares of Alebra represented 16.4% of the net assets of the Fund. As a result, the Fund is, and has been since the end of 2008, unable to comply with Section 2.4 of NI 81-102 by holding more than 15% of its net assets in illiquid securities of Alebra.
10. On April 19, 2010, the Manager made an undertaking to the Commission that the Fund would take all steps towards a partial disposition of its holdings in Alebra, in order to reduce its illiquid asset holdings to less than 15% of the Fund's net assets by no later than May 21, 2010 and, if unable to do so, the Fund would voluntarily go out of distribution until non-compliance with Section 2.4 of NI 81-102 had been remedied (the Undertaking).
11. Due to market conditions, the Fund was unable to reduce its holdings in accordance with the timeline set out in the Undertaking. On May 24, 2010, the Manager issued a press release announcing that, effective May 25, 2010, the Fund was temporarily ceasing distribution of units of the Fund. The Fund has been out of distribution since that time.
12. With respect to a possible liquidity event which would enable the Fund to sell its preferred shares of Alebra, the Manager understands that the board and management of Alebra have been working towards the sale of Alebra in 2010.
13. As of November 23, 2010, the Fund's position in the preferred shares of Alebra represents 27.1% of the net assets of the Fund as a result of a continued decline in the value of other Fund assets due to redemptions and market conditions.
Suspension of Redemptions
14. Because the Fund has been out of distribution for several months, the Manager has determined that in order to mitigate further risk to unitholders, it is in the best interest of the unitholders to effect an orderly wind-up of the Fund through the following steps:
(a) suspending redemptions in the Fund as soon as possible;
(b) selling all liquid positions of the Fund and distributing the proceeds to unitholders; and
(c) upon the eventual sale of Alebra, at which time the Fund expects it could sell its entire position in the preferred shares, distribute the proceeds of that sale to unitholders and promptly terminate the Fund.
15. Pursuant to section 5.5(1)(d) of NI 81-102, the Filers must obtain approval of the Commission before they can suspend the right of unitholders of the Fund to request redemptions.
16. Under the Trust Agreement, the Manager may call for the termination of the Fund without unitholder approval. Upon termination, each unitholder will be paid its proportionate share of the value of the remaining assets of the Fund attributed to the class of units in accordance with the number of units of that class held by the unitholder less any tax required to be withheld.
17. The Manager believes that it is in the best interest of unitholders to return capital to unitholders as soon as possible and then terminate the Fund once the holding in Alebra is liquidated.
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 Requested Approval is granted provided that:
(a) the Suspension of Redemptions may continue until, but not beyond, June 30, 2011;
(b) upon receiving the Requested Approval, the Manager will promptly issue a press release announcing the Suspension of Redemptions and subsequent wind-up and termination of the Fund, followed by a material change report in accordance with subsection 75(2) of the Securities Act (Ontario);
(c) the proceeds of the sale of all liquid positions of the Fund will be distributed to unitholders of the Fund by December 20, 2010;
(d) the Manager will provide status updates to the Commission regarding the valuation and sale status of Alebra on January 31, 2011, and March 31, 2011;
(e) during the Suspension of Redemptions, the Fund will continue to meet its continuous disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure;
(f) the Manager will stop earning and collecting the Management Fees during the Suspension of Redemptions;
(g) the Fund will remain out of distribution during the Suspension of Redemptions and thereafter pending termination; and
(h) the Manager will comply with subsection 5.8(2) of NI 81-102 with respect to providing notice in due course to unitholders of the Fund regarding the termination of the Fund.