Securities Law & Instruments

Headnote

Mutual Reliance Review System for ExemptiveRelief Applications -- Relief from the registration and prospectusrequirements in respect of the first trade by a limited partnershipto its limited partners of warrants to purchase flow-throughshares of resource companies. Limited partnership will dissolvewithin a year. An exemption from the registration and prospectusrequirements is available to distribute warrants to the limitedpartners on the winding up of the limited partnership but notbefore such time. Limited partners were accredited investorswhen they invested in partnership units. It is not practicalfor the limited partnership to monitor the accredited investorstatus of the limited partners.

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am.,ss. 25, 53, 35(1) 12.ii., 72(1)(f)(ii); 74(1).

Ontario Rules

Rule 45-501 -- Exempt Distributions (2001) 24O.S.C.B. 7011.

IN THE MATTER OF

THE SECURITIES LEGISLATIONOF

BRITISH COLUMBIA, ALBERTA,MANITOBA AND ONTARIO

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

QWEST ENERGY RSP/FLOW-THROUGHLIMITED PARTNERSHIP

 

MRRS DECISION DOCUMENT

1. WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") ineach of British Columbia, Alberta, Manitoba and Ontario (the"Jurisdictions") has received an application fromQwest Energy RSP/Flow-Through Limited Partnership ("Qwest")for a decision under the securities legislation of the Jurisdictions(the "Legislation") that the registration requirementand prospectus requirement in the Legislation (the "Registrationand Prospectus Requirements") do not apply, in BritishColumbia and Alberta, to the acquisition of Warrants (definedbelow) by Qwest (the "Warrant Acquisitions") or,in each of the Jurisdictions, to the first trade of Warrantsby Qwest to the limited partners (the "Limited Partners")of Qwest (the "Non-Exempt Trades");

2. AND WHEREAS under the Mutual Reliance ReviewSystem for Exemptive Relief Applications (the "System"),the British Columbia Securities Commission is the principalregulator for this application;

3. AND WHEREAS, unless otherwise defined,the terms herein have the meaning set out in National Instrument14-101 Definitions;

4. AND WHEREAS Qwest has represented to theDecision Makers that:

1. Qwest is a limited partnership formedunder the laws of British Columbia on December 30, 2002under the Partnership Act (British Columbia) to achievecapital appreciation for its Limited Partners primarilyby investing in a diversified portfolio of options, warrantsor similar rights to purchase flow-through shares issuedby resource issuers whose principal business is oil andgas/mineral exploration, development and/or production orenergy generation;

2. Qwest's head office is located in BritishColumbia;

3. Qwest is authorized to issue an unlimitednumber of limited partnership units (the "Units"),of which one Unit is currently issued and outstanding;

4. Qwest is not currently a reporting issueror the equivalent in any jurisdiction in Canada;

5. Qwest Energy RSP/Flow-Through ManagementCorp. (the "General Partner") is the general partnerof Qwest and manages the business and affairs of Qwest;

6. Qwest wishes to conduct a financing inthe Jurisdictions by way of private placement using an offeringmemorandum;

7. in traditional flow-through limited partnershipunit offerings ("Traditional Flow-Through Offerings"),a limited partnership is organized to invest in flow-throughshares issued by resource issuers which are listed on aCanadian stock exchange and whose principal business isoil and gas/mineral exploration, development and/or productionor energy generation; such Traditional Flow-Through Offeringsare usually blind pool offerings;

8. following the first closing of a traditionalFlow-Through Offering, the limited partnership will enterinto agreements to subscribe for common shares from thetreasury of one or more resource issuers ("ResourceCos") under flow-through investment subscription agreements(the "Flow-Through Agreements"); under the Flow-ThroughAgreements, each Resource Co in question will typicallyincur and renounce Canadian Exploration Expense ("CEE")or Canadian Development Expense ("CDE") to thepartnership in an amount equal to the subscription priceof the Resource Co's common shares; that CEE and CDE isthen flowed through the partnership to the limited partnerinvestors;

9. traditional Flow-Through Offerings commonlyprovide that the general partner will propose a liquiditymechanism to the limited partners, at a special meetingto be held approximately 24 months after closing of an initialpublic offering; such liquidity mechanisms typically involveterminating the partnership after exchanging partnershipassets for securities of a mutual fund corporation or otherinvestment vehicle on a tax-deferred basis;

10. if the limited partners do not passan extraordinary resolution to exchange the partnership'sassets for the securities of a mutual fund corporation orother investment vehicle on a tax-deferred basis, the limitedpartners receive a pro rata share of the net assetsof the partnership, including the common shares of ResourceCos held by the partnership;

11. in the flow-through offering structureproposed by Qwest (the "Proposed Flow-Through Offering"),an additional investment in a single-purpose financing vehiclewill be added to the Traditional Flow-Through Offering structure,and the limited partnership will be dissolved sooner thanis the case with Traditional Flow-Through Offerings;

12. investors who have passed a credit evaluationwill have the opportunity to first make an RRSP-eligibleinvestment in bonds issued by a single-purpose financingentity, Qwest Energy RSP/Flow-Through Financial Corp. ("FinancialCorp."), which are guaranteed by a TSX Venture Exchangelisted company, Knightswood Financial Corp.;

13. accordingly, an investor, his or herregistered retirement savings plan ("RRSP") orthe RRSP of the investor's spouse or child will purchasebonds of Financial Corp. maturing on December 31, 2012 whichbear cumulative interest at a rate of approximately 5% perannum (the "Bonds"); the Bonds will initiallybe sold by way of private placement using an offering memorandumin each of the Jurisdictions;

14. Financial Corp. will then loan (a "Loan")the net proceeds from each investor's or RRSP's purchaseof Bonds to that investor (an "RRSP Investor");each Loan will bear interest at a fixed cumulative interestrate of approximately 7.5% per annum and repayment of principalwill be due on December 31, 2012; each Loan will be securedby a pledge of Units of Qwest acquired by the RRSP Investor(with proceeds from the Loan) and any Warrants, Flow-ThroughShares or Mutual Fund Shares (as defined below) registeredin the name of the RRSP Investor along with the RRSP Investor'sinterest in the Investment Portfolio (as defined below)at any time before or after Qwest's dissolution;

15. RRSP Investors will be required by theterms of the Loan to purchase Units of Qwest;

16. the Units will be sold by way of privateplacement using an offering memorandum; in addition to beingsold to RRSP Investors, Units will also be sold to conventionalpurchasers of Flow-Through Shares, other than RRSP Investors,although these purchasers will not receive the same overalltax benefit as an RRSP Investor who has invested in Bondsor whose beneficially-owned RRSP or whose spouse's or child'sbeneficially-owned RRSP has invested in Bonds; the net proceedsof the offering of Units (the "Funds") will bedeposited in a bank account of the General Partner;

17. the limited partnership agreement (the"Partnership Agreement") governing Qwest will:

(a) include standard provisions governingthe formation of Qwest; capital; investment objectives,strategy and guidelines; liabilities of partners; andfunction and powers of the partners;

(b) require Qwest to be dissolved, withoutany approval or other action by the Limited Partners onDecember 31, 2003, or such earlier date on which Qwestdisposes of all of its assets, or a date authorized byan extraordinary resolution of the Limited Partners;

(c) provide that on dissolution of Qwest,any Warrants (as defined below) to purchase flow-throughshares of Resource Cos registered in the name of Qwestwill be distributed among the former Limited Partnersof Qwest pro rata;

(d) grant to the General Partner an irrevocablepower of attorney, which will survive the dissolutionof Qwest, to exercise Warrants to purchase flow-throughshares of Resource Cos on behalf of the former holdersof Units and enter into Investment Agreements (as definedbelow) with Resource Cos; and

(e) grant the General Partner the authority,which will survive the dissolution of Qwest, as agentfor each Limited Partner, to direct payment of the Fundsto Resource Cos upon exercise of Warrants to purchaseflow-through shares of Resource Cos by the Limited Partners;

18. certificates representing the Unitsissued and registered in the name of an RRSP Investor willbe delivered to and held by or on behalf of Financial Corp.as security for that RRSP Investor's Loan under the termsof a pledge contained in the Loan documentation;

19. from time to time throughout 2003, Qwest,as principal, will then enter into agreements to subscribefor warrants, rights or options (the "Warrants")issued by Resource Cos to purchase their flow-through shares(and possibly other incidental securities, such as sharepurchase warrants that are comprised in a unit with a flow-throughshare) (collectively, the "Flow-Through Shares")from treasury; Qwest will pay nominal consideration to eachResource Co in consideration for the issuance of these Warrants;

20. Qwest anticipates that the Warrantswill be issued under the registration and prospectus exemptionscontained in the Legislation applicable to purchases ofsecurities made by "accredited investors" in Ontario;

21. as a "non-redeemable investmentfund", Qwest cannot rely on the accredited investorexemption in Multilateral Instrument 45-103 Capital RaisingExemptions in British Columbia or Alberta to acquirethe Warrants;

22. the Warrants will:

(a) set the exercise price to purchasethe Flow-Through Shares, based on negotiation betweenthe General Partner and the Resource Cos;

(b) be exercisable for a brief periodof time (not to exceed 30 days);

(c) be transferable to the Limited Partnersof Qwest at any time during their term;

(d) be distributable on the dissolutionof Qwest among the former Limited Partners of Qwest;

(e) in the case of Warrants distributedto RRSP Investors, be pledged to Financial Corp. as securityfor Loans and documentation evidencing these Warrantswill be held by Financial Corp. or by a Custodian (asdefined below) on behalf of Financial Corp.;

(f) require the execution of an InvestmentAgreement (defined below) by the Resource Cos and theGeneral Partner, as attorney for each of the Limited Partners,at the time of exercise of the Warrants and before theissuance of the Flow-Through Shares to the Limited Partners;

23. the Investment Agreement and the Warrantswill require that the Resource Cos use not less than 70%of the proceeds received by them on the purchase of theFlow-Through Shares following the exercise of the Warrantsto incur CEE or qualifying CDE, and to use the remainderof the proceeds to incur non-qualifying CDE, which willbe renounced to the holders of the Flow-Through Shares effectiveon December 31, 2003.

24. the Loan documentation between FinancialCorp. and each RRSP Investor will require each RRSP Investor'sWarrants (and any Flow-Through Shares received on exercisethereof or Mutual Fund Shares (as defined below) registeredin the name of the RRSP Investor along with the RRSP Investor'sinterest in the Investment Portfolio (as defined below)to be pledged as security for his or her Loan; the documentsevidencing the Warrants (and on exercise thereof, the sharecertificates representing the Flow-Through Shares or anyother interest in the Investment Portfolio (as defined below)will be held by a custodian (the "Custodian"),which will be a Trust Company, for the benefit of FinancialCorp. or, in the case of Limited Partners who are not RRSPInvestors, by the Custodian as trustee on their behalf;

25. throughout 2003, the Resource Cos whogrant Warrants to Qwest will require funding; accordingly,it will become appropriate for the Warrants to be exercisedand Flow-Through Shares purchased with some of the Funds;Qwest will distribute from the Funds the exercise priceof the Warrants to the Limited Partners pro rata;such Funds will be held by the General Partner as agenton behalf of the Limited Partners;

26. the General Partner, acting on behalfof the Limited Partners, will notify the Resource Cos thatthe Limited Partners have elected to exercise their Warrantsto purchase Flow-Through Shares and, as attorney on behalfof each Limited Partner, will enter into subscription agreements(the "Investment Agreements") with Resource Cos,under which each Limited Partner, in his or her personalcapacity and not in his or her capacity as Limited Partner,will exercise and subscribe for Flow-Through Shares issuedby the Resource Cos under the terms of each Limited Partner'sWarrants; the Investment Agreements will contain the sameterms as are included in conventional flow-through sharesubscription agreements, including the requirement for theResource Cos to use not less than 70% of the proceeds receivedby them from the purchase of the Flow-Through Shares toincur CEE or qualifying CDE and to use the remainder ofthe proceeds to incur non-qualifying CDE, which will berenounced to the holders of the Flow-Through Shares effectiveon December 31, 2003;

27. concurrently with the execution of theInvestment Agreements, the General Partner, as agent foreach Limited Partner, will direct payment to the ResourceCos of the exercise price for the Flow-Through Shares fromthe Funds; certificates representing Flow-Through Shareswill be issued and registered in the names of the LimitedPartners and the General Partner will pay to each ResourceCo the exercise price for these Flow-Through Shares fromthe Funds on behalf of the Limited Partners;

28. the Flow-Through Shares issued and registeredin the name of each RRSP Investor will be held by the Custodianfor the benefit of Financial Corp. as security for thatRRSP Investor's Loan under the terms of a pledge containedin the Loan documentation and under a custodian agreementuntil the earlier of a Liquidity Transaction (as definedbelow) and December 31, 2005; thereafter, any Flow-ThroughShares, any portion of the Investment Portfolio or any MutualFund Shares registered in the name of each RRSP Investorwill be held by Financial Corp. as security for that RRSPInvestor's Loan under the terms of a pledge contained inthe Loan documentation;

29. Flow-Through Shares issued and registeredin the names of Limited Partners other than RRSP Investorswill be delivered to and physically held by the Custodian,as trustee for each such Limited Partner, under a custodianagreement until the earlier of a Liquidity Transaction (asdefined below) and December 31, 2005; thereafter, certificatesand funds in the non-RRSP Investor's Investment Portfoliowill be released to the non-RRSP Investors;

30. some of the Flow-Through Shares willbe qualified by a prospectus and, therefore will be freelytradeable; however, some of the Flow-Through Shares (the"Restricted Flow-Through Shares") may be issuedon a private placement basis and accordingly subject tohold periods;

31. shortly before December 31, 2003, Qwestwill be dissolved; it is anticipated that all Warrants willhave been transferred to the Limited Partners and exercisedand the vast majority of the Funds will have been expendedto purchase Flow-Through Shares before the dissolution ofQwest;

32. immediately before the dissolution,any remaining Funds will be distributed by Qwest to theLimited Partners pro rata in proportion to the numberof Units held by each Limited Partner; the RRSP Investorswill direct that these Funds be held by the Custodian forthe benefit of Financial Corp. as security for their Loans;Limited Partners who are not RRSP Investors will directthat these Funds be held by the Custodian and constitutea component of the Investment Portfolio (described below);

33. the portfolio of Flow-Through Sharesissued and registered in the name of each former LimitedPartner (the "Investment Portfolio") will be heldby the Custodian and will be managed on an ongoing basisby a registered portfolio manager;

34. the Custodian will be granted the contractualdiscretion by the former Limited Partners to sell Flow-ThroughShares (respecting any seasoning periods attached thereto)and other securities comprising the former Limited Partner'sInvestment Portfolio and to reinvest the net proceeds fromsuch dispositions in securities of resource issuers whoseprincipal business is oil and gas, mining, certain energyproduction, pulp and paper, forestry, or a related resourcebusiness, such as a pipeline or service company or utilityon the directions of a registered portfolio manager;

35. on or about February 28, 2005, the GeneralPartner may make a proposal to former Limited Partners toprovide for liquidity and long-term growth of capital, whichmay involve exchanging each former Limited Partner's InvestmentPortfolio for shares ("Mutual Fund Shares") ofa mutual fund corporation or other investment vehicle ona tax-deferred basis (a "Liquidity Transaction");any such liquidity rollover will be subject to obtainingall necessary regulatory approvals and must occur on orbefore June 30, 2005; each former Limited Partner may electwhether or not to exchange their Investment Portfolio forsuch Mutual Fund Shares;

36. on December 31, 2012, the Loans willbecome due; the Loans, however, may also be repaid in fullon not less than 30 days' written notice on June 30 of eachyear beginning on June 30, 2005 and ending on June 30, 2012;upon repayment in full of each Loan, the certificates andFunds in the RRSP Investors' Investment Portfolio or MutualFund Shares held by or on behalf of Financial Corp. as securityfor the Loan will be released to the appropriate RRSP Investor;for RRSP Investors who have repaid the Loan in full butdid not elect the Liquidity Transaction, the earliest datethat the release will occur will be December 31, 2005;

37. the principal received by FinancialCorp. from repayment of the Loans will be distributed toowners of Bonds as a repayment of principal and it is anticipatedthat Financial Corp. will wind-up within the six monthsafter repayment of the Bonds;

38. for tax purposes, in order to allowthe full amount of the renounced CEE and qualifying CDEto be available to the RRSP Investors, the Limited Partnersmust be the persons who exercise the Warrants and acquirethe Flow-Through Shares, rather than Qwest itself; accordingly,for tax purposes, the Warrants must be transferred to theRRSP Investors before they are exercised;

39. Qwest cannot rely on the registrationand prospectus exemptions in the Legislation relating tothe distribution of securities as part of a winding-up todistribute all of the Warrants to the Limited Partners becausethe formal winding-up of Qwest is not scheduled to occuruntil the end of December of 2003; Qwest could structurethe Proposed Flow-Through Offering to include multiple limitedpartnerships that could be wound-up whenever Warrants hadto be distributed; however, this would increase administrativetime, expense and complexity and the likelihood of investorconfusion;

40. due to the structure of the ProposedFlow-Through Offering, the Flow-Through Shares will be subjectto contractual restrictions on transfer by the Limited Partnersuntil at least June 30, 2005, restrictions that are similarto those that would typically occur in Traditional Flow-ThroughOfferings;

5. AND WHEREAS under the System, this MRRSDecision Document evidences the decision of each DecisionMaker (collectively, the "Decision");

6. AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to makethe Decision has been met;

7. THE DECISION of the Decision Makers underthe Legislation is that the Registration and Prospectus Requirementsdo not apply:

(a) in British Columbia and Alberta, tothe Warrant Acquisitions, and

(b) to the Non-Exempt Trades

provided that the first trade in a Warrant(other than a non-Exempt Trade) or a Restricted Flow-ThroughShare issued upon exercise of a Warrant is deemed to be adistribution unless the conditions in sections 2.5(2) and(3) of MI 45-102 Resale of Securities are satisfied.

June 20, 2003.

"Brent W. Aitken"