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Goodman & Company, Investment Counsel Inc. and CMP 2020 Resource Limited Partnership
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from illiquid asset restrictions in section 2.4 of NI 81-102 for non-redeemable investment fund without a redemption feature -- fund is a short-term limited partnership that invests primarily in flow-through shares of resource companies that are reporting issuers -- flow-through shares typically distributed by way of private placement and subject to a hold period and manager has no control over timing of offerings -- relief exempts fund from illiquid asset restrictions with respect to investment of flow-through shares subject to resale restrictions for a limited period.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.4(4), (5), (6), 19.1.
April 1, 2020
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 GOODMAN & COMPANY, INVESTMENT COUNSEL INC. (the Filer) AND IN THE MATTER OF CMP 2020 RESOURCE LIMITED PARTNERSHIP (the Partnership)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf the Partnership and each future limited partnership that is managed by the Filer or an affiliate of the Filer and is identical to the Partnership in all respects which are material to this decision (Future Partnerships, and together with the Partnership, the Partnerships) for a decision under the securities legislation of Ontario (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), from the restrictions concerning illiquid assets applicable to non-redeemable investment funds in subsections 2.4(4), 2.4(5) and 2.4(6) of NI 81-102 (the Illiquid Asset Restrictions), to permit each Partnership, during the Partnership's Initial Investment Restriction Period (as defined below) to purchase and hold up to 100% of its net asset value (NAV) in illiquid assets as a result of purchasing and holding Restricted Period Flow-Through Shares (as defined below), the resale of which is restricted by section 2.5 of National Instrument 45-102 Resale of Securities (NI 45-102) (the Requested Relief).
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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Other Jurisdictions and together with the Jurisdiction, the Jurisdictions).
Interpretation
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 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:
Background
1. The Filer is the investment fund manager and portfolio manager of the Partnership. The Filer is registered as a portfolio manager and an exempt market dealer in each of the Jurisdictions and as an investment fund manager in Ontario, Québec and Newfoundland and Labrador.
2. The Partnership is a limited partnership formed under the laws of the Province of Ontario. The Partnership is a non-redeemable investment fund under NI 81-102.
3. The Filer and the Partnership are not in default of the securities legislation in any of the Jurisdictions.
4. The Partnership received a receipt dated January 30, 2020 for a prospectus filed in all Jurisdictions and is a reporting issuer in all Jurisdictions.
5. The Partnership completed its initial public offering on March 26, 2020 and is out of distribution.
6. The investment objective of the Partnership is to provide for a tax-assisted investment in a diversified portfolio of flow-through shares (Flow-Through Shares) and other securities of resource companies (Resource Companies) with a view to earning income and achieving capital appreciation for its limited partners.
7. Resource Companies are defined as companies, limited partnerships, or other issuers whose principal business is mining exploration, development, and/or production, oil and gas exploration, development, and/or production, certain renewable energy development and/or production, pulp or paper development, processing, and/or production, forestry development and/or production, or a related resource business, such as a pipeline or service company or utility that will incur Canadian Exploration Expenses (CEE), including Canadian Renewable and Conservation Expenses (CRCE).
8. Flow-Through Shares are issued on the basis that the Resource Company will agree to incur and renounce to the Partnership amounts equal to the subscription price of the Flow-Through Shares in expenditures in respect of resource exploration and development which qualify as CEE or as CRCE.
9. The Partnership expects that, like similar prior limited partnerships managed by the Filer (the Prior Partnerships), most of the Flow-Through Shares it acquires will be acquired by way of private placements. Prospectus-qualified offerings of Flow-Through Shares are rare and, generally, more expensive for Resource Companies. Flow-Through Shares of Resource Companies that are reporting issuers and purchased by way of a private placement (Restricted Period Flow-Through Shares) are considered "restricted securities" for purposes of NI 81-102 because they are subject to a four-month resale restriction under section 2.5 of NI 45-102 (the Restricted Period). Restricted Period Flow-Through Shares are considered to be "illiquid assets" under NI 81-102 for the duration of the Restricted Period.
10. The Partnership may acquire other illiquid assets such as Flow-Through Shares of private Resource Companies and warrants exercisable for securities of Resource Companies that are acquired as part of a unit consisting of Flow-Through Shares and warrants (collectively Other Illiquid Assets).
11. Pursuant to its investment restrictions, the Partnership will invest 80% of its initial Available Funds (as defined below) in Resource Companies that are listed on a stock exchange and at least 25% of such Available Funds will be invested in Resource Companies that are listed on the Toronto Stock Exchange. This means that no more than 20% of its initial Available Funds will be invested in Resource Companies that are private issuers or otherwise not listed on a stock exchange. As defined in the Partnership's prospectus, Available Funds means an amount equal to the gross proceeds of the Partnership's initial public offering after deducting a reserve required to fund the on-going fees and expenses of the Partnership, which include the management fee and all expenses incurred in connection with the Partnership's operation and administration (the Cash Reserve).
12. While the Partnership can manage and control the purchase and holding of Other Illiquid Assets, the Partnership has very little discretion over the timing of the opportunity to purchase and the continued holding of Restricted Period Flow-Through Shares in its portfolio for three reasons:
(a) firstly, to achieve its investment objective and to deliver to its limited partners the maximum deductions from income for income tax purposes for the calendar year ending December 31, 2020, the Partnership must fully invest all of its Available Funds by December 31, 2020;
(b) secondly, the Partnership has no control over the manner in which Flow-Through Shares are distributed to the public by Resource Companies or the timing of such distributions, so it is impractical for the Partnership to seek to stagger its acquisition of Flow-Through Shares to allow Restricted Periods to expire before acquiring additional Restricted Period Flow-Through Shares. Investment opportunities may be missed, and the Partnership would be disadvantaged vis-a-vis competitors, including sponsors of charity flow-through transactions that are not subject to NI 81-102 restrictions, if it is unable to participate in an offering of Flow-Through Shares that is otherwise suitable for its portfolio while it is waiting for a Restricted Period to expire; and
(c) thirdly, there are limited options for the resale of Restricted Period Flow-Through Shares pursuant to another prospectus exemption and there are potentially detrimental commercial and tax consequences to the Partnership by doing so. This is because (i) Flow-Through Shares are typically sold at a premium to their prevailing market price, so it may be imprudent to sell such shares unless they have appreciated in value sufficiently to offset such premium in whole or in part, (ii) due to their tax advantages, such shares have a nil cost base to the Partnership and a sale will result in a capital gain for the Partnership, (iii) securities subject to a Restricted Period typically trade at a discount to the market price of free trading securities, and (iv) the market for block trades of Resource Companies in the exempt market is extremely limited.
13. Based on its experience managing the Prior Partnerships, the Filer's view is that the Illiquid Asset Restrictions unduly constrain the Filer's ability to manage the commercial and market constraints noted above.
14. Subsection 2.4(4) of NI 81-102 prohibits a non-redeemable investment fund from purchasing an illiquid asset if, immediately after the purchase, more than 20% of its NAV would be made up of illiquid assets. Subsection 2.4(5) of NI 81-102 prohibits a non-redeemable investment fund from holding, for a period of 90 days or more, more than 25% of its NAV in illiquid assets. Subsection 2.4(6) of NI 81-102 requires a non-redeemable investment fund, if more than 25% of its NAV is made up of illiquid assets, to take all necessary steps as quickly as commercially reasonable, to reduce the percentage of its NAV made up of illiquid assets to 25% or less.
15. In the Filer's experience, the Illiquid Asset Restrictions may negatively impact the Filer's ability to manage a Partnership's portfolio during the period that commences on the date of the issuance of the receipt for the Partnership's prospectus and ending on the date that is four months following the Partnership's fiscal year end being December 31 of the year in which the receipt is issued (the Initial Investment Restriction Period). In the case of the Partnership, the Initial Investment Restriction Period commenced on January 30, 2020 and will end on April 30, 2021.
16. The Filer seeks the Requested Relief to enhance each Partnership's ability to pursue and achieve its investment objectives.
17. The Partnership has no short-term liquidity requirements for two reasons:
(a) it is a closed-end fund and has no redemptions so unlike mutual funds, it has no need for liquidity to fund redemption requests. Limited partners are expected to receive liquidity by way of redeemable mutual shares they will receive pursuant to a reorganization the Partnership intends to carry out with a mutual fund that is disclosed in the Partnership's prospectus rather than by redeeming Partnership units; and
(b) the Partnership retains the Cash Reserve.
18. The Partnership relies on the Cash Reserve to meet its on-going operating expenses including debt service costs on the leverage incurred under its prime brokerage facility in an amount equal to the agents' fee and expenses of the Partnership's offering. Accordingly, consistent with the Filer's experience managing the Prior Partnerships, the Filer believes that it can manage the Partnership's liquidity requirements despite its purchase and holding of Restricted Period Flow-Through Shares as contemplated by the Requested Relief.
19. The Partnership's prospectus discloses that Flow-Through Shares and other securities owned by the Partnership may be illiquid due to resale and other restrictions under applicable securities laws. The prospectus also contains appropriate risk disclosure, alerting investors of any material risks associated with the Partnership's investment in such illiquid assets.
20. The Filer proposes to file a prospectus in respect of each Future Partnership that:
(a) discloses that Flow-Through Shares and other securities owned by the respective Future Partnership may be illiquid due to resale and other restrictions under applicable securities laws;
(b) contains appropriate risk disclosure, alerting investors of any material risks associated with the respective Future Partnership's investment in such illiquid assets; and
(c) discloses the Requested Relief.
21. The Filer proposes to promptly disseminate a news release disclosing receipt of the Requested Relief.
Decision
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
1. The Filer promptly disseminates a news release disclosing receipt of the Requested Relief.
2. The Filer files a prospectus in respect of each Future Partnership that:
(a) discloses that Flow-Through Shares and other securities owned by the respective Future Partnership may be illiquid due to resale and other restrictions under applicable securities laws;
(b) contains appropriate risk disclosure, alerting investors of any material risks associated with the respective Future Partnership's investment in such illiquid assets; and
(c) discloses the Requested Relief.
"Darren McKall"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission