National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Application by TSX Venture Exchange-listed issuer and foreign resident purchaser and manager for exemptive relief to permit the issuer and the purchaser to distribute securities through the TSX Venture Exchange under an "equity line of credit" facility -- An equity line of credit is a type of financing which permits a public company to require, at a time or times of its choosing, that a purchaser purchase newly issued securities of the company at a discount to the market price of the securities at the time of the draw down -- the purchaser will generally finance its purchase commitments and offset market risk through short sales, resales or other hedging transactions in the secondary market during the pricing period with a view to monetizing the spread between the discounted purchase price and the market price -- a draw down under an equity line may be considered to be an indirect at-the-market distribution of securities of the issuer to investors in the secondary market through the equity line purchaser acting as underwriter -- purchaser requires dealer registration and underwriter registration relief -- issuer and purchaser require prospectus form and prospectus delivery relief -- issuer will file shelf prospectus which will qualify resales, short sales and other hedging transactions by purchaser over a specified period -- relief granted to the issuer and purchaser from certain registration and prospectus requirements, subject to terms and conditions, including restrictions on the number of securities that may be distributed under an equity line in any 12-month period, certain restrictions on the permitted activities of the purchaser, timely disclosure of each draw down, and certain notification and disclosure requirements.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, ss. 25(1), 25(2), 71(1), 71(2), 74(1), 147.
National Instrument 44-101 Short Form Prospectus, s. 8.1.
Form 44-101 Short Form Prospectus, item 20.
National Instrument 44-102 Shelf Distributions, ss. 5.5.2, 5.5.3, 11.1.
July 7, 2011
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
HOUSTON LAKE MINING INC. ("Houston" or"the Company"),
DUTCHESS OPPORTUNITY CAYMAN FUND, LTD (the "Purchaser")
DUTCHESS CAPITAL MANAGEMENT II, LLC
(the "Manager", and together with the Company
and the Purchaser, the "Filers")
The principal regulator in the Jurisdiction has received an application (the "Application") from the Filers for a decision under the securities legislation of the Jurisdiction (the "Legislation") for certain exemptions sought, namely:
(a) the following disclosure requirements under the Legislation (the "Prospectus Disclosure Requirements") do not fully apply to Houston in connection with the Distribution (as defined below):
i. the statement in the Prospectus Supplement (as defined below) respecting statutory rights of withdrawal and rescission in the form prescribed by item 20 of Form 44-101F1 of National Instrument 44-101 -- Short Form Prospectus Distributions ("NI 44-101"); and
ii. the statements required by subsections 5.5(2) and (3) of National Instrument 44-102 -- Shelf Distributions ("NI 44-102");
(b) the prohibition from acting as a dealer unless the person is registered as such (the "Dealer Registration Requirement") or from acting as an underwriter unless the person or company is registered as a dealer and is authorized to act as an underwriter in the circumstances (the "Underwriter Registration Requirement") does not apply to the Purchaser and the Manager in connection with the Distribution; and
(c) the requirement that a dealer send a copy of the Prospectus (as defined below) to a subscriber or purchaser in the context of a distribution (the "Prospectus Delivery Requirement") does not apply to the Purchaser and the Manager or the dealer(s) through whom the Purchaser distributes Shares (as defined below) and, as a result, rights of withdrawal or rights of rescission or damages for non-delivery of the Prospectus do not apply in connection with the Distribution (collectively, the "Exemption Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) The Ontario Securities Commission is the principal regulator for this application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia and Alberta.
Terms defined in 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 Filers:
1. Houston is incorporated under the laws of Alberta and has its head office located at 2892 White Street, Val Caron, Ontario, P3N 1B2.
2. Houston is a junior mining company engaged in the exploration and development of precious metals, base metals and rare minerals in the province of Ontario.
3. Houston is currently a reporting issuer under the securities legislation of each of the provinces of Ontario, Alberta and British Columbia and is not in default of the securities legislation in any jurisdiction in Canada.
4. Houston's authorized share capital consists of an unlimited number of common shares ("Shares"), of which 49,532,637 Shares were outstanding as at March 24, 2011.
5. The Shares are listed for trading on the TSX Venture Exchange (the "Exchange") under the symbol "HLM"; based on the closing price of $0.155 of the Shares on the Exchange on March 24, 2011, the current market capitalization of Houston is approximately $7.7 million.
6. Upon the filing of an annual information form for the year ended March 31, 2010, Houston became qualified to file a short form prospectus under section 2.2 of NI 44-101 and is therefore qualified to file a base shelf prospectus under NI 44-102.
7. Houston intends to file with the securities regulators in of Ontario, Alberta and British Columbia a base shelf prospectus (such base shelf prospectus and any amendments thereto referred to as the "Base Shelf Prospectus").
8. The statements in subsection 5.5(2) and (3) of NI 44-102 included in the Base Shelf Prospectus will be qualified by adding the following ", except in cases where an exemption from such delivery requirements has been obtained."
The Purchaser and the Manager
9. The Purchaser is an investment fund established as a Cayman Islands exempt limited partnership and its head office is located at Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.
10. The Purchaser is managed by the Manager, a limited liability corporation incorporated under the laws of Delaware, having its head office at 50 Commonwealth Ave, Suite 2, Boston, Massachusetts, USA. The Manager is an affiliate of the Purchaser under applicable securities laws.
11. The Purchaser is one of a number of investment funds managed by the Manager. The Manager is the investment manager for funds which have made direct investments in growth-stage and mature public companies which span a wide array of sectors using various investment structures such as equity line facilities, equity-linked notes and direct placements.
12. Neither the Purchaser nor the Manager is a reporting issuer or registered as a registered firm as defined in National Instrument 31-103 -- Registration Requirements and Exemptions in any jurisdiction of Canada. Neither the Purchaser nor the Manager is the equivalent of a reporting issuer or registered in any similar capacity in any jurisdiction of the U.S.
13. The Purchaser and the Manager are not in default of securities legislation in any jurisdiction of Canada.
Proposed Distribution Arrangement
14. Houston and the Purchaser propose to enter into an equity line facility agreement (the "Distribution Agreement"), pursuant to which the Purchaser will agree to subscribe for, and Houston will have the right, but not the obligation, to issue and sell up to C$10 million of Shares (the "Aggregate Commitment Amount") over a period of 25 months in a series of drawdowns. Houston will be entitled to request, in respect of each drawdown, an amount that is equal to, in its sole discretion, either (i) $500,000; or (ii) 200% of the average daily volume of the Shares as traded on the Exchange, multiplied by the average of the three daily closing prices immediately preceding the date of such put.
15. The Distribution Agreement will provide Houston with the ability to raise capital as needed from time to time. The Purchaser regularly engages in such transactions. The Purchaser will, in most cases, finance its commitment to subscribe for Shares on a drawdown through short-sales or resales out of existing holdings of Houston's securities.
16. The subscription price per Share and therefore the number of Shares to be issued to the Purchaser for each drawdown will be calculated based on a predetermined percentage discount from the lowest daily volume-weighted average price per Share on the Exchange over a period of five consecutive trading days following a drawdown notice sent by Houston (the "Drawdown Pricing Period"). Specifically, the Shares will be issued at a subscription price equal to the lowest daily volume-weighted average price per Share on the Exchange during the Drawdown Pricing Period multiplied by 95%. Houston may fix in such drawdown notice a minimum subscription price below which it will not issue any Shares. Houston and the Purchaser can mutually agree in writing to amend the minimum price set forth in a drawdown notice during the applicable Drawdown Pricing Period. Notwithstanding the foregoing, the subscription price per Share may not be lower than the volume-weighted average price per Share on the Exchange over a period of five consecutive trading days immediately preceding the applicable drawdown notice, less the permitted discount under the private placement rules contained in the Exchange Company Manual (the "Floor Price").
17. Subject to earlier settlement in certain circumstances, on the seventh trading day following the date of each drawdown notice (each, a "Settlement Date"), the amount of the drawdown will be paid by the Purchaser in consideration for the relevant number of newly issued Shares.
18. The Distribution Agreement will provide that, at the time of each drawdown notice and at each Settlement Date, Houston will make a representation to the Purchaser that the Base Shelf Prospectus, as supplemented (the "Prospectus"), contains full, true and plain disclosure of all material facts relating to Houston and the Shares being distributed. Houston would therefore be unable to issue, or decide to issue, Shares when it is in possession of undisclosed information that would constitute a material fact or a material change.
19. On or after each Settlement Date, the Purchaser may seek to sell all or a portion of the Shares subscribed for under the drawdown.
20. During the term of the Distribution Agreement, the Purchaser and its affiliates, associates or insiders, as a group, will not own at any time, directly or indirectly, Shares representing more than 9.9% of the issued and outstanding Shares.
21. The Purchaser and its affiliates, associates or insiders, will not hold a "net short position" in Shares during the term of the Distribution Agreement. However, the Purchaser may, after the receipt of a drawdown notice, seek to short-sell Shares to be subscribed for under the drawdown, or engage in hedging strategies, in order to reduce the economic risk associated with its commitment to subscribe for Shares, provided that:
i. the Purchaser complies with applicable rules of the Exchange and applicable securities regulations;
ii. the Purchaser and its affiliates, associates or insiders, will not during the period between a drawdown notice and the corresponding Settlement Date, directly or indirectly, sell Shares or grant any right to purchase or acquire any right to dispose of, nor otherwise dispose for value of, any Shares or any securities convertible into or exchangeable for Shares, in an amount exceeding the number of Shares to be subscribed by the Purchaser under the applicable drawdown; and
iii. notwithstanding the foregoing, the Purchaser and its affiliates, associates or insiders, will not, directly or indirectly, sell Shares or grant any right to purchase or acquire any right to dispose of, nor otherwise dispose for value of, any Shares or any securities convertible into or exchangeable for Shares, between the time of delivery of a drawdown notice and the filing of the press release announcing the drawdown.
22. Disclosure of the activities of the Purchaser and its affiliates, associates or insiders, as well as the restrictions thereon, the whole as described in paragraph 21 above, will be included in the Base Shelf Prospectus. In addition, Houston will include in the Base Shelf Prospectus a risk factor that explains that the Purchaser may engage in short-sales, resales or other hedging strategies to reduce or eliminate investment risks associated with a drawdown and that such risk factor will disclose the possibility that such transactions may result in significant dilution to existing shareholders and could have a significant effect on the price of the Shares.
23. No extraordinary commission or consideration will be paid by the Purchaser or the Manager to a person or company in respect of the disposition of Shares by the Purchaser to Exchange Purchasers (as hereinafter defined).
24. The Purchaser and the Manager will also agree, in effecting any disposition of Shares, not to engage in any sales, marketing or solicitation activities of the type undertaken by dealers in the context of a public offering. More specifically, each of the Purchaser and the Manager will not (a) advertise or otherwise hold itself out as a dealer, (b) purchase or sell securities as principal from or to customers, (c) carry a dealer inventory in securities, (d) quote a market in securities, (e) extend, or arrange for the extension of credit, in connection with transactions of securities of Houston, (f) run a book of repurchase and reverse repurchase agreements, (g) use a carrying broker for securities transactions, (h) lend securities for customers, (i) guarantee contract performance or indemnify Houston for any loss or liability from the failure of the transaction to be successfully consummated, or (j) participate in a selling group.
25. The Purchaser and the Manager will not solicit offers to purchase Shares in any jurisdiction of Canada and will sell the Shares to Exchange Purchasers through one or more dealer(s) unaffiliated with the Purchaser, the Manager and Houston.
The Prospectus Supplements
26. Houston intends to file with the securities regulator in some or all of the Provinces a prospectus supplement to the Base Shelf Prospectus (each, a "Prospectus Supplement") within two business days after the Settlement Date for each drawdown under the Distribution Agreement.
27. The Prospectus Supplement will include (i) the number of Shares issued to the Purchaser, (ii) the price per Share paid by the Purchaser, (iii) the information required by NI 44-102, including the disclosure required by subsection 9.1(3) of NI 44-102, and (iv) the following statement:
Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment are not delivered to the purchaser, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. However, such rights and remedies will not be available to purchasers of common shares distributed under this prospectus because the prospectus will not be delivered to purchasers, as permitted under a decision document issued by the Ontario Securities Commission on •, 2011.
The securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contain a misrepresentation, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. Such remedies remain unaffected by the non-delivery of the prospectus, as permitted under the decision document referred to above.
The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's province for the particulars of these rights or consult with a legal adviser.
(the "Amended Statement of Rights")
28. The Base Shelf Prospectus, as supplemented by each Prospectus Supplement, will (a) qualify the distribution of Shares to the Purchaser on the Settlement Date of the drawdown disclosed in the relevant Prospectus Supplement, and (b) qualify the distribution of Shares to purchasers who purchase them from the Purchaser through the dealer(s) engaged by the Purchaser through the TSX Venture Exchange (the "Exchange") (the "Exchange Purchasers") during the period that commences on the date of issuance of a drawdown notice to the Purchaser and ends on the earlier of (i) the date on which the distribution of such Shares has ended or (ii) the 40th day following the Settlement Date (collectively, a "Distribution").
29. The Prospectus Delivery Requirement is not workable in the context of the Distribution because the Exchange Purchasers will not be readily identifiable as the dealer(s) acting on behalf of the Purchaser may combine the sell orders made under the Prospectus with other sell orders and the dealer(s) acting on behalf of the Exchange Purchasers may combine a number of purchase orders.
30. The Prospectus Supplement will contain an underwriter's certificate in the form set out in section 2.2 of Appendix B to NI 44-102, signed by the Purchaser.
31. At least three business days prior to the filing of the first Prospectus Supplement to be filed in connection with a distribution pursuant to the equity line facility under the Distribution Agreement, Houston will provide for comment to the Ontario Securities Commission a draft of such Prospectus Supplement.
Press Releases / Continuous Disclosure
32. Following the execution of the Distribution Agreement, Houston will:
i. promptly issue and file a press release on SEDAR disclosing the material terms of the Distribution Agreement, including the Aggregate Commitment Amount; and
ii. within ten days after said execution:
1. file a copy of the Distribution Agreement on SEDAR; and
2. file a material change report on SEDAR disclosing at a minimum the information required in subparagraph (i) above.
33. Houston will promptly issue and file a press release on SEDAR upon the issuance of each drawdown notice, regardless of the size of the drawdown, disclosing the aggregate amount of the drawdown, the maximum number of Shares to be issued, the minimum price per Share, if any, the Floor Price as well as the fact that the Base Shelf Prospectus is available on SEDAR and specifying how a copy of this document can be obtained.
34. Houston will promptly issue and file a press release on SEDAR upon amending the minimum price set forth in a drawdown notice disclosing the amended minimum price per Share and the maximum number of Shares to be issued.
35. Houston will:
i. issue and file a press release on SEDAR on, or as soon as practicable after, the last day of the Drawdown Pricing Period, disclosing:
1. the number of Shares issued to, and the price per Share paid by, the Purchaser;
2. that the Base Shelf Prospectus and the relevant Prospectus Supplement will be available on SEDAR and specifying how a copy of these documents can be obtained; and
3. the Amended Statement of Rights; and
ii. file a material change report on SEDAR within ten days of the Settlement Date, if the relevant Distribution constitutes a material change under applicable securities legislation, disclosing at a minimum the information required in subparagraph (i) above.
36. Houston will also disclose in its financial statements and management's discussion and analysis filed on SEDAR under National Instrument 51-102 -- Continuous Disclosure Obligations, for each financial period, the number and price of Shares issued to the Purchaser pursuant to the Distribution Agreement.
Deliveries upon Request
37. Houston will deliver to the Ontario Securities Commission and to the Exchange, upon request, a copy of each drawdown notice delivered by Houston to the Purchaser under the Distribution Agreement.
38. The Purchaser and the Manager will provide to the Ontario Securities Commission, upon request, full particulars of trading and hedging activities by the Purchaser or the Manager (and, if required, trading and hedging activities by their respective affiliates, associates or insiders) in relation to securities of Houston during the term of the Distribution Agreement.
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) as it relates to the Prospectus Disclosure Requirement:
(i) Houston comply with the representations in paragraphs 8, 22, 27, 28, 32, 33, 34, 35, 36 and 37; and
(ii) The number of Shares distributed by Houston under the Distribution Agreement does not exceed, in any 12 month period, 19.9% of the aggregate number of Shares outstanding calculated at the beginning of such period;
(b) as it relates to the Prospectus Delivery Requirement, the Dealer Registration Requirement and the Underwriter Registration Requirement, the Purchaser and/or the Manager, as the case may be, comply with the representations in paragraph 21, 23, 24, 25, 30 and 38; and
(c) this decision will only apply to Distributions completed within 25 months following the date of the receipt for the Base Shelf Prospectus, and this decision will terminate 25 months after such date.
As to the Exemption Sought from the Prospectus Disclosure Requirements:
As to the Exemption Sought from the Dealer Registration Requirement, the Underwriter Registration Requirement and the Prospectus Delivery Requirement: