National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted from seed capital requirements for commodity pools in NI 81-104 -- manager permitted to redeem seed investment in pool provided pool has received subscriptions from investors totalling at least $5 million and provided the manager maintains working capital as required for investment fund manager under National Instrument 31-103 Registration Requirements and Exemptions.
Applicable Legislative Provisions
National Instrument 81-104 Commodity Pools, ss. 3.2(2)(a), 10.1.
Citation: Re Auspice Capital Advisors Ltd., 2015 ABASC 667
May 1, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO (the Recipient Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF AUSPICE CAPITAL ADVISORS LTD. (the Filer) AND IN THE MATTER OF CANADIAN CRUDE OIL INDEX ETF AND CANADIAN NATURAL GAS INDEX ETF (the Existing ETFs)
The securities regulatory authority or regulator in each of Alberta and Ontario (each a Decision Maker) has received an application from the Filer on behalf of the Existing ETFs and each other exchange-traded commodity pools as may be established by the Filer or an affiliate of the filer (each an ETF Manager) in the future (the Future ETFs and together with the Existing ETFs, the ETFs and each an ETF) for a decision under the securities legislation of the Jurisdictions (as defined below) (the Legislation) granting, subject to the conditions of this decision, relief from paragraph 3.2(2)(a) of National Instrument 81-104 Commodity Pools (NI 81-104) to permit the required initial investment in an ETF to be redeemed on certain conditions (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Alberta Securities Commission is the principal regulator for this application;
(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 British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Yukon and Nunavut; and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
The following terms have the following meanings in this decision:
(a) Seed Investor means in respect of an ETF each ETF Manager, portfolio adviser, promoter or sponsor or any of their respective directors, officers or shareholders who invests in securities of the ETF before the time of filing the final prospectus of that ETF pursuant to the requirements of paragraph 3.2(1)(a) of NI 81-104.
(b) Unit means a unit of a class or series of units of an ETF.
This decision is based on the following facts represented by the Filer.
1. The Filer is a corporation organized under the laws of Alberta, with a head office in Calgary, Alberta.
2. The Filer is registered as: an investment fund manager in Alberta, British Columbia and Ontario; an exempt market dealer in Alberta, British Columbia and Ontario; a portfolio manager in Alberta; and a commodity trading manager in Ontario.
3. The Filer will be the manager and trustee of the Existing ETFs and an ETF Manager will be the manager and trustee of the Future ETFs.
4. Neither the Filer nor either Existing ETF is in default of securities legislation in any of the Jurisdictions.
5. Each ETF will be a "commodity pool", as such term is defined in NI 81-104, as each ETF will adopt fundamental investment objectives that permit it to use or invest in "specified derivatives" as defined in National Instrument 81-102 Investment Funds (NI 81-102)in a manner that is not permitted under NI 81-102.
6. An ETF Manager will file a long form prospectus in accordance with National Instrument 41-101 General Prospectus Requirements on behalf of each ETF.
7. One or more Seed Investors will invest an aggregate of at least $50,000 in Units of an ETF before the time of the filing the final prospectus of the ETF.
8. Pursuant to subsection 3.2(2) of NI 81-104, unless a redemption, repurchase or return is effected as part of the dissolution or termination of the commodity pool, a commodity pool may redeem, repurchase or return any amount invested in securities issued upon the investment in the commodity pool referred to in paragraph 3.2(1)(a) of NI 81-104 only if securities issued under paragraph 3.2(1)(a) of NI 81-104 that had an aggregate issue price of $50,000 remain outstanding and at least $50,000 invested under paragraph 3.2(1)(a) of NI 81-104 remains invested in the commodity pool.
9. An ETF Manager may wish to redeem the seed capital invested pursuant to the requirement of paragraph 3.2(1)(a) of NI 81-104 in an ETF in accordance with this decision.
10. The Filer understands that the policy rationale behind the permanent seed capital requirement for commodity pools under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of the investors by requiring that the promoter of a commodity pool, or a related party, will itself be an investor in the commodity pool at all times.
11. The ETFs will be properly managed for the benefit of investors because, as the manager of an ETF, the ETF Manager will be obliged in accordance with the terms of the constating document of the ETF, and in accordance with legislative requirements, to at all times act honestly and in good faith, and in the best interest of the ETF, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
12. Having regard to an ETF Manager's fiduciary obligation as set out above, not having $50,000 invested in each ETF at all times will not change how an ETF Manager manages an ETF. An ETF Manager will manage an ETF in accordance with applicable securities legislation in Canada and its contractual requirements. An ETF Manager's interests will generally be aligned with those of investors in the ETF.
13. An ETF Manager of an ETF to which NI 81-102 applies but to which NI 81-104 does not apply, is allowed to redeem its seed capital investment in an ETF upon the ETF having received subscriptions totaling not less than $500,000 from investors other than the persons or companies referred to in paragraph 3.1(1)(a) of NI 81-102. An ETF will not issue securities to investors other than the persons or companies referred to in paragraph 3.2(1)(a) of NI 81-104 unless subscriptions from such other investors aggregating at least $500,000 have been received and accepted by it.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted in respect of an ETF and its ETF Manager provided that:
(a) the ETF Manager may not redeem any of its initial investment in the ETF until $5 million in subscriptions has been received by the ETF from persons or companies other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104;
(b) if, after the ETF Manager redeems its initial investment in the ETF in accordance with condition (a) of this decision, the value of the securities subscribed for by investors other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104 remains below $5 million for more than 30 consecutive days, the applicable ETF Manager will, unless the ETF is in the process of being dissolved or terminated, promptly reinvest $50,000 in the ETF and maintain that investment until the value of securities subscribed for by investors, other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104, is at least $5 million;
(c) the ETF Manager complies with the applicable requirements of registration as an investment fund manager under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) including by maintaining excess working capital of a minimum of $100,000 or such other amount as may be required by NI 31-103; and
(d) the basis on which the ETF Manager may redeem any of its initial investment of $50,000 in an ETF will be disclosed in the ETF's final prospectus.