National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief to permit exchange-traded mutual fund prospectus to omit an underwriter’s certificate – Relief granted from take-over bid requirements for normal course purchases of securities on a marketplace – Relief granted to facilitate the offering of exchange-traded mutual funds.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 59(1), 147.
National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.
Citation: Re SmartBe Wealth Inc., 2019 ABASC 5
January 9, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
SMARTBE WEALTH INC.
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer on behalf of the SmartBe Global Value Momentum Trend Index ETF (the Proposed ETF) and such other exchange-traded mutual funds as may be managed by the Filer or an affiliate of the Filer in the future (the Future ETFs, and together with the Proposed ETF, the ETFs and each an ETF) for a decision under the securities legislation of the Jurisdictions (the Legislation) that:
(a) exempts the Filer and each ETF from the requirement to include a certificate of an underwriter in an ETF’s prospectus (the Underwriter’s Certificate Require-ment); and
(b) exempts a person or company pur-chasing Listed Securities (as defined below) in the normal course through the facilities of the Aequitas NEO Exchange Inc. (NEO Exchange) or another Marketplace (as defined below) from the Take-over Bid Requirements (as defined below)
(collectively, 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 sub-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 and territories of Canada (the Offering Jurisdictions), other than Ontario; and
(c) the 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 or MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
Affiliate Dealer means a registered dealer that is an affiliate of an Authorized Dealer or Designated Broker and that participates in the re-sale of Creation Units (as defined below) from time to time.
Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the manager of an ETF authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more ETFs on a continuous basis from time to time.
Basket of Securities means, in relation to the Listed Securities of an ETF, a group of securities identified from time to time that collectively reflect the constituents of the portfolio of an ETF.
Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the manager of an ETF to perform certain duties in relation to the ETF, including the posting of a liquid two-way market for the trading of the ETF’s Listed Securities on the NEO Exchange or another Marketplace.
Form 41-101F2 means Form 41-101F2 Information Required in an Investment Fund Prospectus.
Listed Securities means a series of securities of an ETF distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2 that is listed on the NEO Exchange or another Marketplace.
Marketplace means a “marketplace” as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.
NI 41-101 means National Instrument 41-101 General Prospectus Requirements.
NI 62-104 means National Instrument 62-104 Take-Over Bids and Issuer Bids.
NI 81-102 means National Instrument 81-102 Investment Funds.
Other Dealer means a registered dealer that acts as authorized dealer or designated broker to exchange-traded funds that are not managed by the Filer.
Prescribed Number of Listed Securities means the number of Listed Securities of an ETF determined by the Filer from time to time for the purpose of subscription orders, exchanges, redemptions or for other purposes.
Securityholders means beneficial or registered holders of Listed Securities or Unlisted Securities (as defined below) as applicable.
Take-over Bid Requirements means the requirements of NI 62-104 relating to take-over bids, including the requirement to file a report of a take-over bid and to pay the accompanying fee, in each Jurisdiction.
Unlisted Securities means a series of securities of an ETF offered only on a private placement basis pursuant to available prospectus exemptions, including the accredited investor exemption, under securities laws.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of the Province of Alberta, with its head office located in Calgary, Alberta.
2. The Filer is registered as an investment fund manager in Alberta and Ontario and as a portfolio manager and exempt market dealer in Alberta, Ontario and British Columbia.
3. The Filer will be the investment fund manager of the ETFs and will be the trustee of the ETFs where the ETF is a trust.
4. The Filer is not in default of securities legislation in any of the Offering Jurisdictions.
5. The Proposed ETF will be a mutual fund structured as a trust that is governed by the laws of a Jurisdiction. The Future ETFs will be either trusts or corporations or classes thereof governed by the laws of a Jurisdiction or the laws of Canada.
6. Subject to any exemptions that have been, or may be, granted by the applicable securities regulatory authorities, each ETF will be an open-ended mutual fund subject to NI 81-102, and Security-holders of each ETF will have the right to vote at a meeting of Securityholders in respect of matters prescribed by NI 81-102.
7. Each ETF may issue more than one series of securities, including, but not limited to Listed Securities and Unlisted Securities.
8. The Filer has filed, or will file, a long form prospectus prepared in accordance with NI 41-101 in respect of the Listed Securities, subject to any exemptions that may be granted by the applicable securities regulatory authorities.
9. Because the Listed Securities will be distributed pursuant to a long form prospectus prepared pursuant to NI 41-101 and Form 41-101F2, each ETF will be a reporting issuer in the Offering Jurisdictions in which its securities are distributed.
10. The Listed Securities will be listed on the NEO Exchange or another Marketplace.
11. Listed Securities will be distributed on a continuous basis in one or more of the Offering Jurisdictions under a prospectus. Listed Securities may generally only be subscribed for or purchased directly from the ETFs (Creation Units) by Authorized Dealers or Designated Brokers. Generally, subscriptions or purchases may only be placed for a Prescribed Number of Listed Securities (or a multiple thereof) on any day when there is a trading session on the NEO Exchange or other Marketplace. Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of Listed Securities on the NEO Exchange or another Marketplace.
12. In addition to subscribing for and re-selling Creation Units, Authorized Dealers, Designated Brokers and Affiliate Dealers will also generally be engaged in purchasing and selling Listed Securities of the same class or series as the Creation Units in the secondary market. Other Dealers may also be engaged in purchasing and selling Listed Securities of the same class or series as the Creation Units in the secondary market despite not being an Authorized Dealer, Designated Broker or Affiliate Dealer.
13. Each Designated Broker or Authorized Dealer that subscribes for Creation Units must deliver, in respect of each Prescribed Number of Listed Securities to be issued, payment consisting of, depending on the terms of the agreement with the Designated Broker or Authorized Dealer or at the Filer’s discretion, a Basket of Securities and cash, cash only or a combination of securities and cash, in each case in an amount sufficient so that the value of the Basket of Securities and cash, cash or securities and cash delivered is equal to the net asset value of the Listed Securities subscribed for next determined following the receipt of the subscription order.
14. Upon notice given by the Filer from time to time and, in any event, not more than once quarterly, a Designated Broker may be contractually required to subscribe for Creation Units of an ETF for cash in an amount not to exceed a specified percentage of the net asset value of the ETF or such other amount established by the Filer.
15. The Designated Brokers and Authorized Dealers will not receive any fees or commissions in connection with the issuance of Creation Units to them. On the issuance of Creation Units, the Filer or the ETF may, at the Filer’s discretion, charge a fee to a Designated Broker or an Authorized Dealer to offset the expenses incurred in issuing the Creation Units.
16. Each ETF will appoint a Designated Broker to perform certain other functions, which include standing in the market with a bid and ask price for Listed Securities for the purpose of maintaining liquidity for the Listed Securities.
17. Except for Authorized Dealer and Designated Broker subscriptions for Creation Units, as described above, and other distributions that are exempt from the prospectus requirement under the Legislation, Listed Securities generally will not be available for purchase directly from an ETF. Investors are generally expected to purchase and sell Listed Securities, directly or indirectly, through dealers executing trades through the facilities of the NEO Exchange or another Marketplace. Listed Securities may also be issued directly to Securityholders upon a reinvestment of distribu-tions of income or capital gains.
18. Securityholders that are not Designated Brokers or Authorized Dealers that wish to dispose of their Listed Securities may generally do so by selling their Listed Securities on the NEO Exchange or other Marketplace, through a registered dealer, subject only to customary brokerage commissions. A Securityholder that holds a Prescribed Number of Listed Securities or multiple thereof may exchange such Listed Securities for, at the discretion of the Filer, Baskets of Securities or other securities and/or cash. Securityholders may also redeem Listed Securities for cash at a redemption price equal to 95% of the closing price of the Listed Securities on the NEO Exchange or other Marketplace on the date of redemption, subject to a maximum redemption price of the applicable net asset value per Listed Security.
19. Holders of Unlisted Securities may redeem such securities in any number for cash at a redemption price per Unlisted Security equal to the net asset value per Unlisted Security on the effective day of redemption.
Underwriter’s Certificate Requirement
20. Authorized Dealers and Designated Brokers will not provide the same services in connection with a distribution of Creation Units as would typically be provided by an underwriter in a conventional underwriting.
21. The Filer will generally conduct its own marketing, advertising and promotion of the ETFs to the extent permitted by its registrations.
22. Authorized Dealers and Designated Brokers will not be involved in the preparation of an ETF’s prospectus, will not perform any review or any independent due diligence as to the content of an ETF’s prospectus, and will not incur any marketing costs or receive any underwriting fees or commissions from an ETF or the Filer in con-nection with the distribution of Listed Securities. The Authorized Dealers and Designated Brokers generally seek to profit from their ability to create and redeem Listed Securities by engaging in arbitrage trading to capture spreads between the trading prices of Listed Securities and their underlying securities and by making markets for their clients to facilitate client trading in Listed Securities.
Take-over Bid Requirements
23. As equity securities that will trade on the NEO Exchange or another Marketplace, it is possible for a person or company to acquire a percentage of the outstanding Listed Securities that will trigger the Take-over Bid Requirements. However:
(a) it will not be possible for one or more Securityholders to exercise control or direction over an ETF, as the constating documents of each ETF will provide that only the Filer may call a meeting of the Securityholders;
(b) it will be difficult for purchasers of Listed Securities to monitor compliance with the Take-over Bid Requirements because the number of outstanding Listed Securities will always be in flux as a result of the ongoing issuance and redemption of Listed Securities by each ETF; and
(c) the way in which the Listed Securities will be priced deters anyone from either seeking to acquire control, or offering to pay a control premium for outstanding Listed Securities because pricing for each Listed Security will generally reflect the net asset value of the Listed Securities.
24. The application of the Take-over Bid Requirements to the ETFs would have an adverse impact upon the liquidity of the Listed Securities, because they could cause Designated Brokers and other large Securityholders to cease trading Listed Securities once a Securityholder has reached the prescribed threshold at which the Take-over Bid Requirements would apply. This, in turn, could serve to provide conventional mutual funds with a competitive advantage over the ETFs.
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.
Alberta Securities Commission