A March 13, 2019
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 Cansortium inc. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the “Application”) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) that the requirements under:
(a) section 12.2 of National Instrument 41-101 General Prospectus Requirements (“NI 41-101”), relating to the use of restricted security terms, and sections 1.13 and 10.6 of Form 41-101F1 Information Required in a Prospectus (“Form 41-101F1”) and sections 1.12 and 7.7 of Form 44-101F1 Short Form Prospectus (“Form 44-101F1”), relating to restricted security disclosure, shall not apply to the common shares in the capital of the Filer (the “Common Shares”) (the “Prospectus Disclosure Exemption”) in connection with: (i) a final long-form prospectus (the “Prospectus”) in connection with the Filer’s initial public offering (the “IPO”); (ii) other prospectuses (“Other Prospectuses”) that may be filed by the Filer under NI 41-101 or National Instrument 44-101 Short Form Prospectus Distributions (“NI 44-101”), including a prospectus filed under National Instrument 44-102 Shelf Distributions;
(b) section 12.3 of NI 41-101 relating to prospectus filing eligibility for distributions of restricted securities shall not apply to distributions of Common Shares (the “Prospectus Eligibility Exemption”) in connection with Other Prospectuses;
(c) Part 10 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) relating to the use of restricted security terms and restricted security disclosure shall not apply to the Common Shares (the “CD Disclosure Exemption”) in connection with continuous disclosure documents (the “CD Documents”) that may be filed by the Filer under NI 51-102;
(d) Part 2 of OSC Rule 56-501 Restricted Shares (“OSC Rule 56-501”) relating to the use of restricted share terms and restricted share disclosure shall not apply to the Common Shares (the “OSC Rule 56-501 Disclosure Exemption”) in connection with dealer and adviser documentation, rights offering circulars and offering memoranda (“OSC Rule 56-501 Documents”) of the Filer; and
(e) Part 3 of OSC Rule 56-501 relating to the withdrawal of prospectus exemptions for distributions of restricted shares shall not apply to the distribution of the Common Shares (the “OSC Rule 56-501 Withdrawal Exemption”) in connection with stock distributions (as defined in OSC Rule 56-501) of the Filer.
The aforementioned requirements are collectively referred to as the “Restricted Security Rules”. The Prospectus Disclosure Exemption, the Prospectus Eligibility Exemption, the CD Disclosure Exemption, the OSC Rule 56-501 Disclosure Exemption and the OSC Rule 56-501 Withdrawal Exemption are collectively referred to as 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 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Saskatchewan (other than with respect to the OSC Rule 56-501 Disclosure Exemption and the OSC Rule 56-501 Withdrawal Exemption), which, pursuant to subsection 8.2(2) of National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions (“NP 11-202”) and subsection 5.2(6) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (“NP 11-203”), also satisfies the notice requirement of subsection 4.7(1)(c) of MI 11-102.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102, NP 11-202, NP 11-203, NI 41-101, NI 44-101, NI 51-102 and OSC Rule 56-501 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:
The Filer is a corporation incorporated under the Business Corporations Act (Ontario) (the “OBCA”) on August 31, 2018 and is not a reporting issuer in any province or territory of Canada.
The registered office of the Filer is located at 295 The West Mall, 6th Floor, Toronto, Ontario, M9C 4Z4, and the head office of the Filer is located at 82 North East 26th Street, Suite 110, Miami, Florida, 33137, United States.
The Filer was incorporated to acquire and hold, directly or indirectly, all of the capital stock of Cansortium Holdings LLC (“CSH”) in contemplation of the IPO.
CSH currently owns, either directly or indirectly, through its subsidiaries, all of the assets and operations relating to the business to be owned, directly or indirectly, by the Filer following completion of the IPO. In connection with the IPO, CSH’s existing securityholders (the “CSH Unitholders”) will exchange all of their membership units of CSH and will receive shares of the Filer pursuant to a reorganization (the “Reorganization”). Following completion of the Reorganization, the Filer will own 100% of the membership units of CSH through a wholly owned subsidiary.
The Filer filed a preliminary long-form prospectus dated February 11, 2019 with the securities regulatory authorities in each of the provinces of Canada, except Quebec, in connection with the IPO. Upon completion of the IPO, the Common Shares will be listed on the Canadian Securities Exchange (the “CSE”).
Currently, the Filer’s authorized share capital consists of one Common Share held by the incorporator or a nominee, which will be cancelled for no payment in connection with completion of the transactions contemplated by the IPO.
Upon completion of the Reorganization, the Filer’s authorized share capital will consist of an unlimited number of Common Shares and an unlimited number of proportionate voting shares (“PV Shares” and, together with the Common Shares, the “Shares”). The PV Shares will constitute subject securities (as defined in NI 41-101, NI 51-102, and OSC Rule 56-501) and the Filer’s only issued and outstanding subject securities will be the PV Shares.
Upon completion of the Reorganization, all of the CSH Unitholders will have exchanged their units of CSH and received PV Shares and Common Shares of the Filer. All of the issued and outstanding PV Shares will be owned or controlled, directly or indirectly, by the former CSH Unitholders.
The Common Shares may, with the consent of the board of directors of the Filer, be converted into PV Shares on the basis of ten Common Shares for one PV Share.
The PV Shares may, at any time at the option of the holder thereof, be converted into Common Shares on the basis of one PV Share for ten Common Shares.
In the event of the liquidation, dissolution or winding-up of the Filer or any other distribution of its assets among its shareholders for the purpose of winding up its affairs, whether voluntarily or involuntarily, the holders of PV Shares will be entitled to participate in the distribution of the remaining property and assets of the Filer, after payment of all debts and other liabilities, with each PV Share being entitled to ten times the amount distributed per Common Share and otherwise without preference or distinction among or between the Shares.
Each PV Share will be entitled to dividends if, as and when dividends are declared by the board of directors, with each PV Share being entitled to ten times the amount paid or distributed per Common Share (or, if a stock dividend is declared, each PV Share shall be entitled to receive the same number of PV Shares per PV Share as the number of Common Shares entitled to be received per Common Share) and otherwise without preference or distinction among or between the Shares.
The Common Shares will carry one vote per share for all matters coming before the shareholders of the Filer and the PV Shares will carry ten votes per share for all matters coming before shareholders of the Filer.
All holders of Shares will be entitled to receive notice of any meeting of shareholders of the Filer, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the OBCA.
The rights, privileges, conditions and restrictions attaching to any Shares may not be modified unless the amendment is authorized by not less than two-thirds of the votes cast at a meeting of holders of the Shares duly held for that purpose. Furthermore, if the holders of the PV Shares, as a class, or the holders of the Common Shares, as a class, are to be affected in a manner materially different from such other class of Shares, the amendment must also be authorized by not less than two-thirds of the votes cast at a meeting of the holders of the class of shares which is affected differently.
No subdivision or consolidation of the Common Shares or PV Shares may be carried out unless, at the same time, the Common Shares or PV Shares, as the case may be, are subdivided or consolidated in the same manner and on the same basis, so as to preserve the relative rights of the holders of each class of Shares.
In addition to the conversion rights described above, if an offer (the “Offer”) is being made for PV Shares where: (a) by reason of applicable securities legislation or stock exchange requirements, the offer must be made to all holders of the class of PV Shares; and (b) no equivalent offer is made for the Common Shares, the holders of Common Shares have the right, at their option, to convert their Common Shares into PV Shares for the purpose of allowing the holders of the Common Shares to tender to that offer.
In the event that holders of Common Shares are entitled to convert their Common Shares into PV Shares in connection with an Offer, holders of an aggregate of Common Shares of less than ten (an “Odd Lot”) will be entitled to convert all, but not less than all, of such Odd Lot of Common Shares into a fraction of one PV Share, provided that such conversion into a fractional PV Share will be solely for the purpose of tendering the fractional PV Share to the Offer in question and that any fraction of a PV Share that is tendered to the Offer but that is not, for any reason, taken up and paid for by the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.
The Filer is seeking the Exemption Sought in respect of, among other things, references to the Common Shares in the Prospectus, Other Prospectuses and CD Documents.
Section 12.2 of NI 41-101 requires that an issuer must not refer to a security in a prospectus by a term or a defined term that includes the word “common” unless the security is an equity security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are not less, per security, than the voting rights attached to any other outstanding security of the issuer.
Section 12.3 of NI 41-101 requires that an issuer must not file a prospectus under which restricted securities, subject securities or securities that are, directly or indirectly convertible into, or exercisable or exchangeable for, restricted securities or subject securities, are distributed unless:
(a) the distribution has received prior majority approval of the securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer, or
(b) at the time of any restricted security reorganization related to the securities to be distributed (i) the restricted security reorganization received prior majority approval of the securityholders of the issuer in accordance with applicable law, including approval on a class basis if required and excluding any votes attaching at the time to securities held, directly or indirectly, by affiliates of the issuer or control persons of the issuer, (ii) the issuer was a reporting issuer in at least one jurisdiction, and (iii) no purposes or business reasons for the creation of restricted securities were disclosed that are inconsistent with the purpose of the distribution.
Sections 1.13 and 10.6 of Form 41-101F1 and sections 1.12 and 7.7 of Form 44-101F1 require that an issuer provide certain restricted security disclosure.
Pursuant to the Restricted Security Rules, a “restricted security” means an equity security of a reporting issuer if any of the following apply:
(a) there is another class of securities of the reporting issuer that, to a reasonable person, appears to carry a greater number of votes per security relative to the equity security;
(b) the conditions of the class of equity securities, the conditions attached to another class of securities of the reporting issuer, or the reporting issuer’s constating documents have provisions that nullify or, to a reasonable person appear to significantly restrict the voting rights of the equity securities; or
(c) the reporting issuer has issued another class of equity securities that, to a reasonable person, appears to entitle the owners of securities of that other class to participate in the earnings or assets of the reporting issuer to a greater extent, on a per security basis, than the owners of the first class of equity securities.
Section 10.1 of NI 51-102 requires a reporting issuer that has outstanding restricted securities, or securities that are directly or indirectly convertible into or exercisable or exchangeable for restricted securities or securities that will, when issued, result in an existing class of outstanding securities being considered restricted securities, to provide specific disclosure with respect to such securities in its information circular, a document required by NI 51-102 to be delivered upon request by a reporting issuer to any of its securityholders, an annual information form prepared by the issuer, as well as any other document that it sends to its securityholders.
Section 10.2 of NI 51-102 sets out the procedure to be followed with respect to the dissemination of disclosure documents to holders of restricted securities.
Section 2.2 of OSC Rule 56-501 requires dealer and adviser documentation to include the appropriate restricted share term if restricted shares and the appropriate restricted share term or a code reference to restricted shares or the appropriate restricted share term are included in a trading record published by the CSE or other exchange listed in OSC Rule 56-501.
Section 2.3 of OSC Rule 56-501 requires that a rights offering circular or offering memorandum for a stock distribution prepared for a reporting issuer comply with certain requirements including, among others, the restricted shares may not be referred to by a term or a defined term that includes “common”, “preference” or “preferred” and that such shares shall be referred to using a term or a defined term that includes the appropriate restricted share term.
Section 3.2 of OSC Rule 56-501 provides that the prospectus exemptions under Ontario securities law are not available for a stock distribution of securities of a reporting issuer or an issuer if the issuer will become a reporting issuer as a result of the stock distribution unless either the stock distribution received minority approval of shareholders or all the conditions set out in subsection 3.2(2) are satisfied and the information circular relating to the shareholders’ meeting held to obtain such minority approval for the stock distribution included prescribed disclosure.
As the PV Shares will entitle the holder thereof to ten votes per PV Share held, it will technically represent a class of securities to which multiple votes is attached. The multiple votes attaching to the PV Shares would, absent the Exemption Sought, have the following consequences in respect of the technical status of the Common Shares:
(a) pursuant to NI 41-101 and NI 44-101, the Filer would be unable to use the word “common” to refer to the Common Shares in the Prospectus and Other Prospectuses because the PV Shares would represent a security to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of securities owned, that are more, per security than the voting rights attached to the Common Shares;
(b) the Common Shares could be considered “restricted securities” pursuant to paragraph (a) of the definition of the term in NI 51-102 and the Filer would be required to provide the specific disclosure required by NI 51-102 in respect of the Common Shares because the PV Shares would represent another class of securities of the Filer that, to a reasonable person, appears to carry a greater number of votes per security relative to the Common Shares;
(c) the Common Shares would be considered “restricted shares” pursuant to OSC Rule 56-501 and the Filer would be subject to the dealer and advisor documentary disclosure obligations and distribution restrictions in OSC Rule 56-501 because the PV Shares would represent a security to which is attached voting rights exercisable in all circumstances, irrespective of the number of percentage of shares owned, that are more, on a per share basis, than the voting rights attaching to the Common Shares of the Filer and the Filer would be unable to use the word “common” to refer to the Common Shares in a rights offering circular or offering memorandum for a stock distribution.
The Common Shares would be “restricted securities” as defined in NI 41-101 and NI 51-102, and “restricted shares” as defined in OSC Rule 56-501, solely as a result of the PV Shares.
The CSE advised the Filer on November 5, 2018 that it will permit the Filer to designate the Common Shares as common shares, provided that the Exemption Sought is granted.
Decision
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) in connection with the Prospectus Disclosure Exemption as it applies to the Prospectus, at the time the Filer relies on the Exemption Sought:
i. the representations in paragraphs 7 to 18, above, continue to apply;
ii. the Filer has no restricted securities (as defined in section 1.1 of NI 41-101) issued and outstanding other than the Common Shares; and
iii. the Prospectus includes disclosure consistent with the representations in paragraphs 7 to 18 above;
(b) in connection with the Prospectus Disclosure Exemption and the Prospectus Eligibility Exemption as they apply to the Other Prospectuses, at the time the Filer relies on the Exemption Sought:
i. the representations in paragraphs 7 to 18, above, continue to apply;
ii. the Filer has no restricted securities (as defined in section 1.1 of NI 41-101) issued and outstanding other than the Common Shares; and
iii. the Other Prospectuses include disclosure consistent with the representations in paragraphs 7 to 18 above;
(c) in connection with the CD Disclosure Exemption as it applies to the Other CD Documents, at the time the Filer relies on the Exemption Sought:
i. the representations in paragraphs 7 to 18, above, continue to apply; and
ii. the Filer has no restricted securities (as defined in subsection 1.1(1) of NI 51-102) issued and outstanding other than the Common Shares;
(d) in connection with the OSC Rule 56-501 Disclosure Exemption as it applies to the OSC Rule 56-501 Documents, at the time the Filer relies on the Exemption Sought:
i. the representations in paragraphs 7 to 18, above, continue to apply; and
ii. the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56-501) issued and outstanding other than the Common Shares;
(e) in connection with the OSC Rule 56-501 Withdrawal Exemption, at the time the Filer relies on the Exemption Sought:
i. the representations in paragraphs 7 to 18, above, continue to apply; and
ii. the Filer has no restricted shares (as defined in section 1.1 of OSC Rule 56-501) issued and outstanding other than the Common Shares.
“Michael Balter”
Michael Balter
Manager, Corporate Finance
Ontario Securities Commission