Securities Law & Instruments


Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Issuer granted relief from certain restricted security requirements under National Instrument 41-101 General Prospectus Requirements, National Instrument 44-101 Short Form Prospectus Distributions, and National Instrument 51-102 Continuous Disclosure Obligations – relief granted subject to conditions.

OSC Rule 56-501 Restricted Shares – Issuer granted relief from certain restricted share requirements under OSC Rule 56-501 – relief granted subject to conditions.

Applicable Legislative Provisions

National Instrument 41-101 General Prospectus Requirements, ss. 12.2, 12.3, 19.1.
Form 41-101F1 Information Required in a Prospectus, ss. 1.13, 10.6.
National Instrument 44-101 Short Form Prospectus Distributions, s. 8.1.
Form 44-101F1 Short Form Prospectus, ss. 1.12 and 7.7.
National Instrument 51-102 Continuous Disclosure Obligations, Part 10 and s. 13.1.
OSC Rule 56-501 Restricted Shares, Parts 2 and 3, and s. 4.2.

August 23, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the “Jurisdiction”)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
CHARLOTTE’S WEB HOLDINGS, INC.
(the “Filer”)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) that the requirement under:

(a)           Section 12.2 of National Instrument 41-101 General Prospectus Requirements (“NI 41-101”), relating to the use of restricted security terms, and sections 1.13 and 10.6 of Form 41-101F1 Information Required in a Prospectus (“Form 41-101F1”) and sections 1.12 and 7.7 of Form 44-101F1 Short Form Prospectus (“Form 44-101F1”) relating to restricted security disclosure shall not apply to the common shares in the capital of the Filer (the “Common Shares”) (the “Prospectus Disclosure Exemption”) in connection with: (i) a final prospectus and any amendments thereto (the “IPO Prospectus”) for the Filer to be filed in connection with the IPO (as defined below); and (ii) other prospectuses (“Other Prospectuses”) that may be filed by the Filer under National Instrument 44-101 Short Form Prospectus Distributions (“NI 44-101”), including a prospectus filed under National Instrument 44-102 Shelf Distributions;

(b)           Section 12.3 of NI 41-101 relating to prospectus filing eligibility for distributions of restricted securities shall not apply to distributions of Common Shares (the “Prospectus Eligibility Exemption”) in connection with Other Prospectuses;

(c)           Part 10 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) relating to the use of restricted security terms and restricted security disclosure shall not apply to the Common Shares (the “CD Disclosure Exemption”) in connection with continuous disclosure documents (“Other CD Documents”) that may be filed by the Filer under NI 51-102;

(d)           Part 2 of OSC Rule 56-501 Restricted Shares (“OSC Rule 56-501”) relating to the use of restricted share terms and restricted share disclosure shall not apply to the Common Shares (the “OSC Rule 56-501 Disclosure Exemption”) in connection with dealer and adviser documentation, rights offering circulars and offering memoranda (“OSC Rule 56-501 Documents”) of the Filer; and

(e)           Part 3 of OSC Rule 56-501 relating to the withdrawal of prospectus exemptions for distributions of restricted shares shall not apply to the distribution of the Common Shares (as defined below) (the “OSC Rule 56-501 Withdrawal Exemption”) in connection with stock distributions (as defined in OSC Rule 56-501) of the Filer.

The Prospectus Disclosure Exemption, the Prospectus Eligibility Exemption, the CD Disclosure Exemption, the OSC Rule 56-501 Disclosure Exemption and the OSC Rule 56-501 Withdrawal Exemption are collectively referred to as the “Exemption Sought”.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i)            the Ontario Securities Commission is the principal regulator for this Application, and

(ii)           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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Saskatchewan (other than with respect to the OSC Rule 56-501 Disclosure Exemption and the OSC Rule 56-501 Withdrawal Exemption) (the “Passport Jurisdictions”) which, pursuant to Section 5.2(6) of National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions (“NP 11-203”), also satisfies the notice requirement of Section 4.7(1)(c) of MI 11-102.

Interpretation

Terms defined in National Instrument 14-101 Definitions, MI 11-102, NP 11-203, NI 41-101, NI 44-101, NI 51-102 and OSC Rule 56-501 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 corporation incorporated under the Business Corporations Act (British Columbia) (“BCBCA”) and is not a reporting issuer in any province or territory of Canada.

2.             The registered office of the Filer is located at Suite 2800, 666 Burrard Street, Vancouver, British Columbia, V6C 2Z7, and its headquarters are located at 2425 55th Street, Suite 200, Boulder, Colorado 80301, United States.

3.             The Filer was incorporated to acquire and hold all of the capital stock of CWB Holdings, Inc. (“CWB”) in contemplation of the initial public offering consisting of a treasury issuance and a secondary offering of Common Shares (the “IPO”).

4.             CWB currently owns, either directly or indirectly, through its subsidiaries, all of the assets and operations relating to the business to be owned, directly or indirectly, by the Filer following completion of the IPO. Immediately following the IPO, CWB’s existing securityholders, other than those who have exercised any applicable right of dissent, will exchange all of their ordinary shares of CWB for shares of the Filer pursuant to an acquisition agreement. Following completion of the acquisition, the Filer will indirectly own 100% of the ordinary shares of CWB.

5.             The Filer filed a preliminary long form prospectus dated June 25, 2018 (“Preliminary Prospectus”) with the securities regulatory authorities in each of the provinces of Canada (other than Quebec) in connection with the IPO. Upon completion of the IPO, the Common Shares will be listed on the Canadian Securities Exchange (“CSE”).

6.             Currently, the Filer’s share capital consists of one or more Common Shares held by the incorporator or a nominee, all of which will be cancelled for no payment in connection with the completion of the transaction contemplated by the IPO.

7.             Immediately prior to the closing of the IPO (“Closing”) and upon completion of a reorganization (the “Reorganization”), the Filer's authorized share capital will consist of an unlimited number of Common Shares, proportionate voting shares (“PV Shares”) (together with the Common Shares the “Equity Shares”) and preferred shares issuable in series. No preferred shares will be issued or outstanding immediately after Closing of the IPO and the Reorganization.

8.             Upon completion of the IPO and Reorganization, the Filer’s only issued and outstanding subject securities (as defined in NI 41-101, NI 51-102, and OSC 56-501) will be the PV Shares.

9.             The Common Shares may at any time, at the option of the holder and with the consent of the Filer, be converted into PV Shares on the following basis: 400 Common Shares for one PV Share.

10.          The PV Shares may at any time, at the option of the holder, be converted into Common Shares on the basis of one PV Share for 400 Common Shares, with fractional PV Shares convertible into Common Shares on the same ratio.

11.          Immediately after to the Closing of the IPO, as part of the Reorganization to be completed in connection with the Closing, all of the existing shareholders of CWB (the “CWB Shareholders”), other than those who have exercised any applicable right of dissent, will exchange their shares of CWB for PV Shares of the Filer. In addition, the holders of CWB options or other convertible securities will exchange such securities for options or convertible securities of the Filer on the same terms after giving effect to the Reorganization, such securities of the Filer being exercisable for PV Shares.

12.          Upon completion of the IPO and the Reorganization, all of the issued and outstanding PV Shares will be held or controlled, directly or indirectly, by the former CWB Shareholders.

13.          In the event of the liquidation, dissolution or winding-up of the Filer, the holders of Equity Shares will be entitled to participate in the distribution of the remaining property and assets of the Filer on the following basis, and otherwise without preference or distinction among or between the Equity Shares: each PV Share will be entitled to 400 times the amount distributed per Common Share and fractional PV Shares will be entitled to the applicable fraction thereof.

14.          Each PV Share will be entitled to dividends if, as and when declared by the board of directors of the Filer, on the following basis, and otherwise without preference or distinction among or between such shares: each PV Share will be entitled to 400 times the amount paid or distributed per Common Share, and fractional PV Shares will be entitled to the applicable fraction thereof.

15.          The Common Shares will carry one vote per share for all matters coming before the shareholders and the PV Shares will carry 400 votes per share for all matters coming before the shareholders. Fractional PV Shares will be entitled to the number of votes calculated by multiplying the fraction by 400.

16.          The holders of Equity Shares are entitled to receive notice of any meeting of shareholders of the Filer and to attend, vote and speak at such meetings, except those meetings at which holders of a specific class of shares are entitled to vote separately as a class under the BCBCA.

17.          The rights, privileges, conditions and restrictions attaching to any Equity Shares may be modified if the amendment is authorized by not less than 662/3% of the votes cast at a meeting of holders of Equity Shares duly held for that purpose. However, if the holders of PV Shares, as a class, or the holders of Common Shares, as a class, are to be affected in a manner materially different from such other class of Equity Shares, the amendment must, in addition, be authorized by not less than 662/3% of the votes cast at a meeting of the holders of the class of shares which is affected differently.

18.          No subdivision or consolidation of the Common Shares or PV Shares may be carried out unless, at the same time, the Common Shares or PV Shares, as the case may be, are subdivided or consolidated in the same manner and on the same basis, so as to preserve the relative rights of the holders of each class of Equity Shares.

19.          In addition to the conversion rights described above, if an offer (the “Offer”) is being made for PV Shares where: (a) by reason of applicable securities legislation or stock exchange requirements, the offer must be made to all holders of the class of PV Shares; and (b) no equivalent offer is made for the Common Shares, the holders of Common Shares have the right, at their option, to convert their Common Shares into PV Shares for the purpose of allowing the holders of the Common Shares to tender to that offer.

20.          In the event that holders of Common Shares are entitled to convert their Common Shares into PV Shares in connection with an Offer, holders of an aggregate of Common Shares of less than 400 (an “Odd Lot”) will be entitled to convert all but not less than all of such Odd Lot of Common Shares into a fraction of one PV Share, at a conversion ratio equivalent to 400 to 1, provided that such conversion into a fractional PV Share will be solely for the purpose of tendering the fractional PV Share to the Offer in question and that any fraction of a PV Share that is tendered to the Offer but that is not, for any reason, taken up and paid for by the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.

21.          The Filer is seeking the Exemption Sought in respect of, among other things, references to the Common Shares of the Filer in the Prospectus, Other Prospectuses and Other CD Documents.

22.          Subsection 12.2 of NI 41-101 requires that an issuer must not refer to a security in a prospectus by a term or a defined term that includes the word “common” unless the security is an equity security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are not less, per security, than the voting rights attached to any other outstanding security of the issuer.

23.          Subsection 12.3 of NI 41-101 requires that an issuer must not file a prospectus under which restricted securities, subject securities or securities that are, directly or indirectly convertible into, or exercisable or exchangeable for, restricted securities or subject securities, are distributed unless: (a) the distribution has received prior majority approval of the securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer, or (b) at the time of any restricted security reorganization related to the securities to be distributed (i) restricted security reorganization received prior majority approval of securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer, (ii) the issuer was a reporting issuer in at least one jurisdiction, and (iii) no purposes or business reasons for the creation of restricted securities were disclose that are inconsistent with the purpose of distribution.

24.          Pursuant to NI 51-102, a “restricted security” means an equity security of a reporting issuer if any of the following apply: (a) there is another class of securities of the reporting issuer that, to a reasonable person, appears to carry a greater number of votes per security relative to the equity security; (b) the conditions of the class of equity securities, the conditions attached to another class of securities of the reporting issuer, or the reporting issuer's constating documents have provisions that nullify or, to a reasonable person appear to significantly restrict the voting rights of the equity securities; or (c) the reporting issuer has issued another class of equity securities that, to a reasonable person, appears to entitle the owners of securities of that other class to participate in the earnings or assets of the reporting issuer to a greater extent, on a per security basis, than the owners of the first class of equity securities.

25.          Subsection 10.1 of NI 51-102 requires a reporting issuer that has outstanding restricted securities, or securities that are directly or indirectly convertible into or exercisable or exchangeable for restricted securities or securities that will, when issued, result in an existing class of outstanding securities being considered restricted securities, to provide specific disclosure with respect to such securities in its information circular, a document required by NI 51-102 to be delivered upon request by a reporting issuer to any of its securityholders, an annual information form prepared by the issuer, as well as in any other document that it sends to its securityholders.

26.          Subsection 2.2 of OSC Rule 56-501 requires dealer and adviser documentation to include the appropriate restricted share term if restricted shares and the appropriate restricted share term or a code reference to restricted shares or the appropriate restricted share term are included in a trading record published by the Canadian Stock Exchange or other exchange listed in OSC Rule 56-501 or a trade reporting and quotation system operated by The Canadian Dealing Network Inc.

27.          Subsection 2.3 of OSC Rule 56-501 requires that a rights offering circular or offering memorandum for a stock distribution prepared for a reporting issuer comply with certain requirements including, among others, the restricted shares may not be referred to by a term or a defined term that includes “common”, “preference” or “preferred” and that such shares shall be referred to using a term or a defined term that includes the appropriate restricted share term.

28.          Subsection 3.2 of OSC Rule 56-501 provides that the prospectus exemptions under Ontario securities law are not available for a stock distribution of securities of a reporting issuer or an issuer if the issuer will become a reporting issuer as a result of the stock distribution unless either the stock distribution received minority approval of shareholders or all the conditions set out in subsection 3.2(2) are satisfied and the information circular relating to the shareholders’ meeting held to obtain such minority approval for the stock distribution included prescribed disclosure. Pursuant to subsection 4.2 of OSC Rule 56¬501, the Director may determine that the Filer is exempt from Parts 2 and 3 of OSC Rule 56-501.

29.          As a PV Share will entitle the holder thereof to 400 votes per PV Share held, it will technically represent a class of securities to which multiple votes is attached. The multiple votes attaching to the PV Shares would, absent the Exemption Sought, have the following consequences in respect of the technical status of the Common Shares: (i) pursuant to Subsection 12.2(1) of NI 41-101, the Filer would be unable to use the word “common” to refer to the Common Shares in a prospectus because the PV Shares would represent a security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are more, per security than the voting rights attached to the Common Shares and (ii) the Common Shares could be considered “restricted securities” pursuant to para. (a) of the definition of the term in 51-102 and the Filer would be required to provide the specific disclosure required by NI 51-102 in respect of the Common Shares because the PV Shares would represent another class of securities of the Filer that, to a reasonable person, appears to carry a greater number of votes per security relative to the Common Shares, and (iii) the Common Shares would be considered “restricted shares” pursuant to OSC Rule 56-501 and the Filer would be subject to the dealer and adviser documentary disclosure obligations and distribution restrictions of OSC Rule 56-501 because the PV Shares would represent securities to which are attached voting rights exercisable in all circumstances, irrespective of the number of percentage of shares owned, that are more, on a per share basis, than the voting rights attaching to the Common Shares of the Filer.

30.          Following completion of the IPO and the Reorganization, the Common Shares would be “restricted securities” as defined in NI 41-101 and NI 51-102, and “restricted shares” as defined in OSC Rule 56-501, solely as a result of the PV Shares.

31.          The Filer has submitted the necessary initial documents to the CSE including an initial application letter on Form 1A. In accordance with CSE policy, the Filer expects to receive conditional listing approval after submission to the CSE of a Form 2A and the final prospectus in respect of the IPO, subject to the satisfaction of customary conditions.

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:

(a)           in connection with the Prospectus Disclosure Exemption as it applies to the IPO Prospectus, at the time the Filer relies on the Exemption Sought:

(i)            representations 7-20 above continue to apply;

(ii)           The Filer has no restricted securities (as defined in section 1.1 of NI 41-101) issued and outstanding other than the Common Shares; and

(iii)           the IPO Prospectus includes disclosure consistent with representations 7-20, above.

(b)           in connection with the Prospectus Disclosure Exemption and the Prospectus Eligibility Exemption as they apply to the Other Prospectuses, at the time the Filer relies on the Exemption Sought:

(i)            representations 7-20, above, continue to apply;

(ii)           the Filer has no restricted securities (as defined in section 1.1 of NI 41-101) issued and outstanding other than the Common Shares; and

(iii)           the Other Prospectuses include disclosure consistent with representations 7-20 above.

(c)           in connection with the CD Disclosure Exemption as it applies to the Other CD Documents, at the time the Filer relies on the Exemption Sought:

(i)            representations 7-20, above, continue to apply; and

(ii)           the Filer has no restricted securities (as defined in subsection 1.1(1) of NI 51-102) issued and outstanding other than the Common Shares.

(d)           in connection with the OSC Rule 56-501 Disclosure Exemption as it applies to the OSC Rule 56-501 Documents, at the time the Filer relies on the Exemption Sought:

(i)            representations 7-20, above, continue to apply; and

(ii)           the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56-501) issued and outstanding other than the Common Shares.

(e)           in connection with the OSC Rule 56-501 Withdrawal Exemption, at the time the Filer relies on the Exemption Sought:

(i)            representations 7-20, above, continue to apply; and

(ii)           the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56-501) issued and outstanding other than the Common Shares.

“Sonny Randhawa”
Deputy Director, Corporate Finance
Ontario Securities Commission