June 16, 2022
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 3iQ CORP. (the Filer)
AND
IN THE MATTER OF
3iQ COINSHARES BITCOIN ETF
3iQ COINSHARES ETHER ETF
(collectively, the Existing ETFs)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Existing ETFs and any additional exchange-traded mutual funds (the Future ETFs, and together with the Existing ETFs, the ETFs) of which the Filer, or an affiliate of the Filer, will be the investment fund manager of in the future, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that exempts the Filer and each ETF 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 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
(a) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 – Passport System is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (together with the Jurisdiction, the Jurisdictions).
Interpretation
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 (as defined below) that are subscribed for or purchased directly from the ETFs by Authorized Dealers, Designated Brokers and other permitted purchasers.
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 Listed Securities on the TSX or another Marketplace.
Digital Asset means bitcoin or ether.
Exchange means the Toronto Stock Exchange or another stock exchange recognized by the Ontario Securities Commission.
Listed Securities means a series of securities of an ETF distributed pursuant to a long-form prospectus filed in accordance with National Instrument 41-101 – General Prospectus Requirements (NI 41-101) that is listed on an Exchange.
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.
Terms defined in National Instrument 14-101 – Definitions (NI 14-101) or in NI 81-102 have the same meaning in this decision as in NI 14-101 or NI 81‑102.
Representations
This decision is based on the following facts represented by the Filer.
The Filer
The Filer is a corporation incorporated under the laws of Canada, with its registered office located at 4800-1 King Street West, Box 160, Toronto, Ontario M5H 1A1.
The Filer is registered as (a) a portfolio manager and exempt market dealer in Alberta, British Columbia, Ontario and Quebec, (b) an investment fund manager in Alberta, Ontario and Quebec and (c) a commodity trading manager in Ontario.
The Filer is the investment fund manager of the Existing ETFs and the Filer or an affiliate of the Filer will be, the investment fund manager of the Future ETFs.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The ETFs
Each Existing ETF is, and each Future ETF will be, a reporting issuer under the laws of the Jurisdictions and an open-ended mutual fund subject to NI 81-102.
Each Existing ETF issues, and each Future ETF will subject to the approval of the applicable Exchange issue, Listed Securities.
Each ETF has filed, or will file, a final long-form prospectus prepared in accordance with NI 41-101 with the securities regulatory authorities in each of the Jurisdictions to qualify the issuance of its Listed Securities in each of the Jurisdictions on a continuous basis.
The investment objective of each of the ETFs is, or will be, to provide its securityholders with exposure to a Digital Asset
Each of the ETFs seeks, or will seek, to achieve its investment objective by buying and holding substantially all of its assets in bitcoin and/or ether.
Neither of the Existing ETFs is in default of securities legislation in any of the Jurisdictions.
In-Kind Subscriptions
Generally, subscriptions for 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 an Exchange. Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of Listed Securities on the Exchange.
Subsection 9.4(2) of NI 81-102 provides that a mutual fund may accept as subscription proceeds for its securities either cash or securities. Digital Assets are neither cash nor securities.
Absent the Exemption Sought, an ETF would be prohibited by subsection 9.4(2) of NI 81-102 from accepting Digital Assets as payment, in whole or in part, for Creation Units.
The price that an investor can purchase the Listed Securities of an ETF for on an Exchange 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 Listed Security of the ETF.
Generally, 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 of an ETF bears to the net asset value per Listed Security of the ETF. This differential is borne by the investors in the ETF.
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 Listed Security of the ETF.
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.
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.
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) 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 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 the 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 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.
“Darren McKall”
Darren McKall
Manager, Investment Funds and Structured Products
ONTARIO SECURITIES COMMISSION
Application No 2022/0233
SEDAR Project No. 3380963