Registration closes May 14: OSC Dialogue 2024: Inviting, thriving and secure capital markets
Priviti Capital Corporation
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from subparagraphs 13.5(2)(b)(ii) and (iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to permit transfer of illiquid assets from two funds to one fund managed and advised by the same manager -- the funds are not reporting issuers -- relief subject to conditions including independent valuation and requirement for independent review committee approval.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(b)(ii)-(iii) and 15.1.
Citation: Re Priviti Capital Corporation, 2021 ABASC 167
October 25, 2021
IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF PRIVITI CAPITAL CORPORATION (the Filer)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption (the Exemption Sought) from the prohibition in subparagraphs 13.5(2)(b)(ii) and 13.5(2)(b)(iii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibit a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of a responsible person, an associate of the registered adviser or an investment fund for which the registered adviser acts as an adviser, in order to permit Priviti Energy Limited Partnership 2011 (the 2011 Fund) and Priviti Energy Limited Partnership 2012 (the 2012 Fund and collectively with the 2011 Fund, the Expiring Funds) to sell the Illiquid Assets (as defined below) to Priviti Oil & Gas Opportunities Limited Partnership 2014 (the 2014 Fund and collectively with the Expiring Funds, the Funds) and the 2014 Fund to purchase the Illiquid Assets from each of the Expiring Funds.
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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each province in Canada other than Alberta and 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.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102, National Instrument 81-102 Investment Funds (NI 81-102), and NI 31-103 have the same meaning if used in this decision, unless otherwise defined herein.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Alberta with its head office in Calgary, Alberta.
2. The Filer is registered as a restricted portfolio manager in Alberta and an investment fund manager in Alberta, Ontario, Quebec, and Newfoundland and Labrador.
3. The Filer is not in default of applicable securities laws.
4. The Funds are investment funds formed as limited partnerships under the laws of Alberta. The Funds are not in default of applicable securities laws.
5. Priviti Energy 2011 General Partner Corp., a corporation incorporated under the laws of the Province of Alberta, is the general partner of the 2011 Fund (the 2011 GP), Priviti Energy 2012 General Partner Corp., a corporation incorporated under the laws of the Province of Alberta, is the general partner of the 2012 Fund (the 2012 GP) and Priviti Oil & Gas Opportunities 2014 General Partner Corp., a corporation incorporated under the laws of the Province of Alberta, is the general partner of the 2014 Fund (collectively with the 2011 GP and the 2012 GP, the General Partners). The Filer is the sole shareholder of each General Partner.
6. The General Partners have retained the Filer to act as the investment fund manager and portfolio manager for each of the Funds.
7. The Expiring Funds are not reporting issuers under applicable securities laws and are not subject to NI 81-102. The investment objectives of each of the Expiring Funds are to invest in a portfolio of securities of private companies that operate in the Canadian oil and gas sector to provide the opportunity for capital appreciation and to distribute to unitholders cash proceeds realized on periodic liquidity events.
8. The 2014 Fund is not a reporting issuer under applicable securities laws and is not subject to NI 81-102. The investment objectives of the 2014 Fund are the same as the Expiring Funds, other than the 2014 Fund may also invest in public companies that operate in the Canadian oil and gas sector.
9. Pursuant to the terms of the 2014 Fund's limited partnership agreement, its term will expire on December 31, 2023.
10. Pursuant to the terms of each of the Expiring Funds' limited partnership agreements, the term of each of the Expiring Funds will expire on December 31, 2021 (the Term). The Filer has been liquidating and will continue to liquidate the existing portfolio securities of each of the Existing Funds in an orderly manner, subject to market conditions, and has been distributing and will distribute the proceeds of the sale of the assets of each of the Expiring Funds to their respective unitholders.
11. The Filer anticipates certain of the assets of each of the Expiring Funds', the equity securities of two private issuers (collectively the Private Issuers) that are not traded on any exchange, may be difficult to sell prior to the expiry of the Term given that there is not a strong secondary or "grey" market for such securities as they are "illiquid assets" as defined in NI 81-102 (the Illiquid Assets).
12. The Term of the 2011 Fund had already been extended for three additional years pursuant to special meetings of the unitholders and the Term of the 2012 Fund had already been extended for two additional years pursuant to a special meeting of the unitholders. Rather than trying to extend the Term of the Expiring Funds to allow for the sale of the Illiquid Assets by holding additional special meetings of the unitholders of each of the Expiring Funds, or the Filer selling the Illiquid Assets to a third party at a price below their value due to an illiquid market (both of which options the Filer does not believe are in the best interests of the unitholders of each of the Expiring Funds), it is proposed that each of the Expiring Funds sell the Illiquid Assets to the 2014 Fund at a fair value based on an independent quote of the fair value of the Illiquid Assets obtained from an independent and experienced broker (the Trade).
13. It will be neither practical nor economical to make a distribution "in kind" of portions of the Illiquid Assets to unitholders of each of the Expiring Funds since unitholders will have difficulty finding a market, if any, for the Illiquid Assets. Further, any "in kind" distribution would result in very small "odd lot" share positions of the Private Issuers, thus increasing the difficulty for holders of such positions to find a market for such securities. In addition, many of the unitholders in each of the Expiring Funds have held their interests in the Expiring Funds for approximately ten years in the case of the 2011 Fund and approximately nine years for the 2012 Fund and have indicated to the Filer in informal conversations regarding the Trade that they do not want to receive an "in kind" distribution.
14. The 2014 Fund unitholders will receive disclosure that the 2014 Fund has purchased the Illiquid Assets from the Expiring Funds and a description of the conflicts of interest related to the Trade. The Filer will also disclose how the fair value of the Illiquid Assets was determined.
15. The Filer is a responsible person for the purpose of paragraph 13.5(2)(b) of NI 31-103 and, absent the Exemption Sought, is prohibited from effecting the Trade.
16. The Trade will be consistent with the investment objectives of the Funds.
17. The decision to sell the Illiquid Assets on behalf of each of the Expiring Funds to the 2014 Fund has been made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Funds.
18. The Funds will establish an independent review committee (the IRC) in respect of the Trade in accordance with section 3.7 of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), which IRC will be subject to all of the provisions of section 3.9 of NI 81-107. The IRC will oversee the Trade for each of the Expiring Funds and the 2014 Fund after making separate determinations for each Fund in respect of the Trade as provided under paragraphs 5.2(2)(a), (b), (c) and (d) of NI 81-107.
19. The Filer will receive no remuneration with respect to any purchase or sale of the Illiquid Assets between the Funds.
20. With respect to the delivery of Illiquid Assets, the only expenses which will be incurred by the Expiring Funds will be nominal administrative charges levied by the custodian and/or record keeper of each of the Expiring Funds for recording the trades.
21. For each purchase or sale of Illiquid Assets between the Funds, each of the Funds will keep written records in the financial year of the respective Fund. These records will reflect details of the securities received or delivered by the respective Fund and the value assigned to such securities. These records will be retained for five years after the end of the financial year in which the trade occurred, and for the most recent two years, these records will be kept in a reasonably accessible place.
22. Each of the Funds provides annual audited financial statements as at December 31 and unaudited quarterly financial statements to its unitholders. Unitholders of each of the Funds have received audited financial statements for the year ended December 31, 2020 and unaudited quarterly financial statements as at June 30, 2021.
Decision
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, provided that the following conditions are satisfied:
(a) The Illiquid Assets are securities of private companies that are not traded on an exchange, and are sold by each of the Expiring Funds to the 2014 Fund at fair value based on an independent quote of the fair value of the Illiquid Assets obtained from an independent broker.
(b) The Filer will refer the Trade to the IRC for review. The IRC will oversee the Trade for each of the Funds after making the determinations for each Fund provided under paragraphs 5.2(2)(a), (b), (c) and (d) of NI 81-107. The IRC of the Funds will be composed in accordance with section 3.7 of NI 81-107 and will be subject to all of the provisions set out in section 3.9 of NI 81-107.
(c) The Filer will receive no remuneration with respect to any purchase or sale of Illiquid Assets between the Funds.
(d) With respect to the delivery of Illiquid Assets, the only expenses which will be incurred by the Expiring Funds will be nominal administrative charges levied by the custodian and/or record keeper of each of the Expiring Funds for recording the trades.
(e) The Funds will keep written records of the transactions reflecting the details of the portfolio securities delivered by each of the Expiring Funds to the 2014 Fund and the value assigned to such securities for five years after the end of the financial year in which the trade occurred, and for the most recent two years, these records will be kept in a reasonably accessible place.
"Lynn Tsutsumi"
Director, Market Regulation