CI Investments Inc. et al.
Headnote
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 -- subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 9.4(2) and 19.1.
February 22, 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 CI INVESTMENTS INC. (THE FILER) AND IN THE MATTER OF CI GALAXY BITCOIN ETF AND IN THE MATTER OF CI GALAXY ETHEREUM ETF (EACH A REPRESENTATIVE ETF)
DECISION
BACKGROUND
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the ETFs (as defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) that 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 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 the 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 all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).
INTERPRETATION
Terms defined in National Instrument 14-101 -- Definitions, NI 81-102 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following terms have the following meanings:
(a) Authorized Dealer means a registered dealer that has entered, or intends to enter, into an agreement with the Filer, authorizing the dealer to subscribe for, purchase and redeem Creation Units from one or more ETFs on a continuous basis from time to time.
(b) Creation Units means Listed Securities that are subscribed for or purchased directly from the ETFs by Authorized Dealers, Designated Brokers and other permitted purchasers.
(c) Digital Asset means bitcoin or ether.
(d) Designated Broker means a registered dealer that has entered, or intends to enter, into an agreement with the Filer 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 an Exchange.
(e) Exchange means the Toronto Stock Exchange or another stock exchange recognized by the Ontario Securities Commission.
(f) ETF means each of the Representative ETFs and other exchange-traded funds now, or in the future, that intends to hold Digital Assets in its investment portfolio and that is, or will be, managed by the Filer and that offers or will offer Listed Securities.
(g) Filer means CI Investments Inc. or its affiliate.
(h) Listed Securities means a series of securities of an ETF distributed pursuant to a long form prospectus that is listed on an Exchange.
(i) 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.
(j) Representative ETF means CI Galaxy Bitcoin ETF or CI Galaxy Ethereum ETF.
(k) 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.
REPRESENTATIONS
This decision is based on the following facts represented by the Filer.
The Filer
1. The Filer is a corporation amalgamated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The registered office of the Filer is located in Toronto, Ontario.
3. The Filer is registered:
(a) as an investment fund manager under the securities legislation in Ontario, Québec and Newfoundland and Labrador;
(b) as a portfolio manager and exempt market dealer under the securities legislation of each of the Jurisdictions; and
(c) as a commodity trading counsel and commodity trading manager under the Commodity Futures Act (Ontario).
4. The Filer will be the trustee and investment fund manager of each ETF.
5. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Representative ETFs
6. Each Representative ETF is a reporting issuer under the laws of all of the Jurisdictions and is an open-ended mutual fund subject to NI 81-102.
7. Each Representative ETF may issue more than one series of securities, including, but not limited to, Listed Securities and Unlisted Securities.
8. CI Galaxy Bitcoin ETF filed a final long form prospectus on March 4, 2021 with the securities regulatory authorities, and CI Galaxy Ethereum ETF filed the same on April 16, 2021, in each of the Jurisdictions to qualify the issuance of its Listed Securities in each of the Jurisdictions on a continuous basis.
9. Neither of the Representative ETFs is in default of securities legislation in any of the Jurisdictions.
10. The investment objective of CI Galaxy Bitcoin ETF is to provide unitholders exposure to bitcoin through an institutional-quality fund platform. This Representative ETF seeks to buy and hold substantially all of its assets in bitcoin.
11. The investment objective of CI Galaxy Ethereum ETF is to provide unitholders exposure to ether through an institutional-quality fund platform. This Representative ETF seeks to buy and hold substantially all of its assets in ether.
In-Kind Subscriptions and Redemptions
12. 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 an Exchange. Authorized Dealers or Designated Brokers subscribe for Creation Units for the purpose of facilitating investor purchases of Listed Securities on the Exchange.
13. 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.
14. 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.
15. The price that investors 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 security of the ETF.
16. 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.
17. 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.
18. 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.
19. 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 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 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"
Manager
Investment Funds & Structured Products
Ontario Securities Commission
Application File #: 2021/0105
SEDAR #: 3176038