Fidelity Investments Canada ULC and Fidelity Advantage Bitcoin ETF™
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemptive relief granted from s. 9.4(2) of NI 81-102 to an exchange-traded fund in order to permit the fund to accept certain digital assets as subscription proceeds for units of the fund -- Exemptive relief granted from related issuer restrictions to permit the purchase by the fund of Crypto Contracts from an entity affiliated to the manager of the fund -- subject to conditions.
Applicable Legislative Provisions
Securities Act (Ontario), ss. 111(2)(c)(ii), 111(4) and 113.
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(a) and 15.1.
National Instrument 81-102 Investment Funds, ss. 4.2(1), 9.4(2), and 19.1.
November 19, 2021
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 FIDELITY INVESTMENTS CANADA ULC (the Filer) AND IN THE MATTER OF FIDELITY ADVANTAGE BITCOIN ETF™ (the Proposed ETF)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Filer, the Proposed ETF and any additional exchange-traded mutual funds (the Future ETFs, and, together with the Proposed ETF, the ETFs and individually, an ETF) established in the future for which the Filer is the manager, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that:
(i) exempts the ETFs from subsection 9.4(2) of National Instrument 81-102 Investment Funds (NI 81-102), to permit each ETF to accept Digital Assets (as defined below) as subscription proceeds for Creation Units (as defined below) (the Subscription Proceeds Relief);
(ii) exempts the ETFs from subsection 4.2(1) of NI 81-102 to permit each ETF to purchase Crypto Contracts (as defined below) from, and sell Crypto Contracts to, Fidelity Clearing Canada ULC (FCC) (the NI 81-102 Relief);
(iii) exempts the Filer from subsection 13.5(2)(a) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to permit the Filer to cause an ETF to purchase Crypto Contracts from FCC (the NI 31-103 Relief); and
(iv) exempts the ETFs from subsections 111(2)(c)(ii) and 111(4) of the Securities Act (Ontario) (the Act) to permit each ETF to purchase Crypto Contracts from FCC (the Act Relief),
(collectively, the Requested Relief).
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 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, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon (together with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
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.
Creation Units means Listed Securities that are subscribed for or purchased directly from the ETFs by Authorized Dealers, Designated Brokers and other permitted purchasers.
Crypto Contract means the contractual right of an ETF to receive, or the contractual obligation of an ETF to deliver, a Digital Asset, in each case from or to FCC.
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 Toronto Stock Exchange or another Marketplace.
Digital Assets means bitcoin and ether.
IRC means the independent review committee of, among others, the ETFs.
Listed Securities means a series of securities of an ETF distributed pursuant to a long form prospectus that is listed on the Toronto Stock Exchange or another Marketplace that is an exchange.
Marketplace means a "marketplace" as defined in National Instrument 21-101 Marketplace Operation that is located in Canada.
NI 81-107 means National Instrument 81-107 Independent Review Committee for Investment Funds.
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 applicable.
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 amalgamated under the laws of the Province of Alberta with its head office located in Toronto, Ontario.
2. The Filer is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a portfolio manager and mutual fund dealer in each of the Jurisdictions and as a commodity trading manager in Ontario.
3. The Filer will be the investment fund manager of the ETFs and the Filer or an affiliate of the Filer will be the portfolio manager of the ETFs.
4. The Filer is not in default of securities legislation in any of the Jurisdictions.
5. The Proposed ETF will be a mutual fund structured as a trust that is governed by the laws of the Province of Ontario. The Future ETFs will be either trusts or corporations or classes thereof governed by the laws of a Jurisdiction or the laws of Canada. Each ETF will be a reporting issuer in the Jurisdiction(s) in which its Listed Securities are distributed.
6. Subject to any exemption that may be granted by the applicable securities regulatory authorities, each ETF will be an open-ended mutual fund subject to NI 81-102.
7. The Filer has established the IRC in respect of, among others, the ETFs in accordance with NI 81-107.
8. Each ETF may issue more than one series of securities, including, but not limited to, Listed Securities and Unlisted Securities.
9. The Filer has filed, or will file, a long form prospectus in respect of the Listed Securities of the Proposed ETF, subject to any exemption that may be granted by the applicable securities regulatory authorities.
10. Because the Listed Securities of the ETFs will be distributed pursuant to a long form prospectus, each ETF will be a reporting issuer in the Jurisdictions in which its securities are distributed.
11. The Listed Securities will be listed on the Toronto Stock Exchange or another Marketplace that is an exchange. The Filer will not file a final prospectus for any ETF in respect of its Listed Securities until the Toronto Stock Exchange or other applicable Marketplace has conditionally approved the listing of such Listed Securities.
12. Listed Securities will be distributed on a continuous basis in one or more of the Jurisdictions under a prospectus.
13. The investment objective of the Proposed ETF is to aim to invest in bitcoin. The investment objectives of the Future ETFs will include investment in one or more Digital Assets.
In-kind Subscriptions and Redemptions
14. Generally, subscriptions or purchases of Creation Units 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 Toronto Stock 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 Toronto Stock Exchange or another Marketplace.
15. Subsection 9.4(2) of NI 81-102 provides that a mutual fund may accept as subscription proceeds for its securities, including Creation Units, either cash or securities. Digital Assets are neither cash nor securities.
16. Absent exemptive relief, each ETF is prohibited under subsection 9.4(2) of NI 81-102 from accepting Digital Assets as payment, in whole or in part, for Creation Units.
17. The price that investors can purchase the Listed Securities of an ETF for on the Toronto Stock Exchange or another Marketplace is largely determined by the hedging costs of the Authorized Dealers and Designated Broker. The lower the cost of the hedging instruments, the closer the trading price that the investor receives for their Listed Securities will be to the net asset value per security of the ETF.
18. In the case of each ETF, if the Authorized Dealers and the Designated Broker are not able to hedge with the applicable Digital Asset itself and if these parties cannot deliver that Digital Asset in kind to the ETF, the trading price for the Listed Securities of the ETF will be determined based on the price of those futures contracts where the underlying interest is the applicable Digital Asset. The difference between the price of the Digital Asset and the price of the futures contract is reflected in the premium or the discount that the trading price of the Listed Securities bears to the net asset value per security of the Listed Securities. This differential is borne by the investors in the ETF.
19. Permitting Digital Assets to be used to satisfy in-kind subscriptions of Creation Units of each ETF will result in the trading price of the Listed Securities being more closely aligned to the net asset value per security of the ETF.
20. The Digital Asset delivered to an ETF to satisfy the issue price for in-kind subscriptions of Creation Units will be valued by the ETF for purposes of determining the net asset value of the ETF in accordance with the valuation principles of the ETF disclosed in its most recent prospectus.
21. Each ETF may also accept cash as subscription proceeds for its securities, including Creation Units. To the extent that an ETF holds cash and consistent with its investment objective, it may use that cash to purchase Digital Assets.
ETFs Entering into Crypto Contracts with FCC
22. FCC is a registered dealer that is permitted to sell Digital Assets to certain of its clients, including the ETFs. FCC is an affiliate of the Filer and the two have a common shareholder structure. In addition, an officer of the Filer is currently an officer of FCC. In the future, other individuals may be officers of both the Filer and FCC.
23. The purchase by an ETF of a Digital Asset through, and the sale by the ETF of a Digital Asset through, FCC creates a Crypto Contract issued by FCC in favour of the ETF. Section 6.2 of NI 81-107 provides an exemption which permits an investment fund to make an investment in the security of an issuer related to its manager if the purchase is made on the exchange where the security is listed and traded, but it does not permit an ETF, or the Filer on behalf of an ETF, to purchase a Crypto Contract issued by FCC.
24. Absent exemptive relief, each ETF is prohibited under subsection 4.2(1) of NI 81-102, subsection 13.5(2)(a) of NI 31-103, and subsections 111(2)(c)(ii) and 111(4) of the Act from purchasing, holding or selling Crypto Contracts.
25. The Requested Relief is not prejudicial to the public interest or to investor protection.
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 Requested Relief is granted, provided that:
(a) the acceptance of Digital Assets as payment, in whole or in part, for the issue price of Creation Units is made in accordance with paragraph 9.4(2)(b) of NI 81-102; and
(b) the Filer enter into an agreement with the Designated Broker, each Authorized Dealer and any other person that is permitted to pay for Listed Securities or Unlisted Securities purchased directly from an ETF by delivering Digital Assets to the ETF that requires, among other things, that all Digital Assets delivered in kind to an ETF as payment for the issue price of securities of the ETF:
(i) be acquired only on an exchange, trading platform or trading venue, or from an OTC counterparty, that (A) is registered, or exempt from registration, as a dealer or a marketplace in Canada, or (B) is regulated as a trust company or a broker-dealer under the laws of a state of the United States, and, in each case, is required under such registration or by its regulator, as the case may be, to comply with the laws of the applicable jurisdiction aimed at the prevention and detection of money laundering and terrorist financing activities; and
(ii) be delivered directly from the exchange, trading venue or counterparty to the digital wallet of the ETF at its custodian or sub-custodian;
(c) any Crypto Contract purchased, held or sold by an ETF is subject to the following conditions:
(i) the purchase, holding or sale is consistent with the investment objectives of the ETF;
(ii) the Filer, as the investment fund manager of the ETF, refers the purchase, holding and sale of Crypto Contracts involving such ETF to the IRC in the manner contemplated by section 5.1 of NI 81-107, and the Filer and the IRC comply with section 5.4 of NI 81-107 in respect of any standing instructions the IRC provides in connection with such transactions;
(iii) the IRC has approved the transactions in Crypto Contracts in respect of the ETF in accordance with the terms of section 5.2 of NI 81-107;
(iv) other than the purchase or sale price of the applicable Digital Asset and the execution costs payable by the ETF for such purchases and sales, the ETF neither pays nor receives any consideration in respect of the Crypto Contract and does not pay a fee in respect of any transaction in Crypto Contracts; and
(v) the ETF keeps written records of each purchase and sale of Crypto Contracts for five years after the end of the fiscal year in which the purchase or sale occurred, and in a reasonably accessible place for each purchase and sale that occurred during the most recent two years.
The Subscription Proceeds Relief, the 81-102 Relief and the NI 31-103 Relief:
Investment Funds and Structured Products
Ontario Securities Commission
The Act Relief:
Ontario Securities Commission
Ontario Securities Commission
Application File #: 2021/0681
Sedar #: 3303970