HEXO Corp. and 2692106 Ontario Inc

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Dual application for exemptive relief in relation to proposed distributions of securities by issuer by way of a committed equity facility (also known as an "equity line of credit") -- an equity line of credit is a type of financing which permits a public company to sell newly issued securities of the company at a discount to the market price of the securities -- issuer entered into an equity purchase agreement with a purchaser that may be considered to be acting as an "underwriter" distributing shares of the issuer through the facilities of the TSX in the context of an equity line of credit distribution -- a draw down under an equity line of credit may be considered to be an indirect distribution of securities by the company to subsequent purchasers of securities from the equity line purchaser -- relief granted to issuer and equity line purchaser from certain registration and prospectus disclosure and prospectus delivery requirements under securities legislation, subject to terms and conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 71(1) and 74(1).

National Instrument 44-101 Short Form Prospectus Distributions, s. 8.1.

Form 44-101F1 Short Form Prospectus, Item 20.

National Instrument 44-102 Shelf Distributions, ss. 5.5.2, 5.5.3 and 11.1.

[TRANSLATION]

August 19, 2022

IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HEXO CORP. (the Issuer) AND 2692106 ONTARIO INC. (the Purchaser, and together with the Issuer, the Filers)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the Legislation) for:

(a) an exemption from the following disclosure requirements under the Legislation (the Prospectus Disclosure Requirements) so that such requirements do not apply to the Issuer in connection with the Offering (as defined below):

(i) the statement in the Prospectus Supplement (as defined below) respecting statutory rights of withdrawal and rescission, revision of price or damages in the form prescribed by item 20 of Form 44-101F1 of Regulation 44-101 respecting Short Form Prospectus Distributions (chapter V-1.1, r.16) (Regulation 44-101); and

(ii) the statements to be included in a base shelf prospectus other than the Issuer's existing amended and restated short form base shelf prospectus dated May 25, 2021 (the Base Shelf Prospectus) required by subsections 5.5(2) and (3) of Regulation 44-102 respecting Shelf Distributions (chapter V1.1, r.17) (Regulation 44-102);

(b) an exemption from the prohibition from acting as a dealer or underwriter unless the person or company has registered as such (the Registration Requirement) so that such a requirement does not apply to the Purchaser in connection with the Offering; and

(c) an exemption from the requirements under the Legislation that a dealer send a copy of the Prospectus (as defined below) to a subscriber or purchaser in the context of a distribution (the Prospectus Delivery Requirement), and a purchaser's right to withdrawal, revocation or rescission within two days of receipt of the Prospectus, so that such requirements do not apply to the Purchaser or the dealer(s) through whom the Purchaser distributes the Distribution Shares (as defined below) and that, as a result, rights of withdrawal or rights of rescission, price revision or damages for non-delivery of the Prospectus do not apply in connection with the Offering;

(collectively, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Autorité des marchés financiers is the principal regulator for this application,

(b) the Filers have provided notice that section 4.7(1) of Regulation 11-102 respecting Passport System (chapter V-1.1, r.1) (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon; 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 Regulation 14-101 respecting Definitions (chapter V-1.1, r.3) and Regulation 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filers:

The Issuer

1. The Issuer is a corporation incorporated under the Business Corporations Act (Ontario) with its head office located at 120 de la Rive Road, Gatineau, province of Québec and its registered office located at 500 College Street East, Belleville, province of Ontario;

2. The Issuer is a reporting issuer in all of the jurisdictions of Canada and is not in default of securities legislation in any jurisdiction of Canada. The Issuer is also a registrant with the United States Securities and Exchange Commission;

3. The Issuer's authorized share capital currently consists of an unlimited number of common shares (the Shares), of which 600,988,447 Shares are outstanding, and an unlimited number of special shares issuable in series, of which none are outstanding, as at August 4, 2022;

4. The Shares are listed for trading on the Toronto Stock Exchange (TSX) and NASDAQ under the symbol "HEXO". Based on the closing price of $0.255 of the Shares on the TSX on August 4, 2022, the current market capitalization of the Issuer is approximately $153,252,054;

5. On April 15, 2021, the Issuer filed a notice of intention to be qualified to file a short form prospectus pursuant to section 2.8 of Regulation 44-101, and is eligible to file a short form prospectus under section 2.2 of Regulation 44-101 and a base shelf prospectus under section 2.2 of Regulation 44-102;

6. On May 25, 2021, the Issuer filed the Base Shelf Prospectus in all of the jurisdictions of Canada. As of the date hereof, there remains capacity for the Issuer to issue additional equity securities under the Base Shelf Prospectus;

7. The Issuer intends to file a supplement to the Base Shelf Prospectus in respect of the Offering in all of the jurisdictions of Canada (the Prospectus Supplement);

The Purchaser

8. The Purchaser is an Ontario corporation and its head office is located at 118 Yorkville Ave., Unit 604, Toronto, province of Ontario;

9. The Purchaser has been established to, among other things, purchase and sell, as principal, securities of publicly traded entities, using various investment structures, including without limitation, equity securities pursuant to equity lines of credit;

10. Neither the Purchaser nor any affiliate of the Purchaser is a reporting issuer or registered as a registered firm as defined in Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (chapter V-1.1, r.10) in any jurisdiction of Canada;

11. The Purchaser is not in default of securities legislation in any jurisdiction of Canada;

12. The Purchaser is an "accredited investor" as defined in Regulation 45-106 respecting Prospectus Exemptions (chapter V-1.1, r.21);

The Equity Purchase Agreement and Proposed Distribution Arrangements

13. The Issuer has entered into an equity purchase agreement dated April 11, 2022 (as amended on May 9, 2022, June 13, 2022, and July 5, 2022, the Equity Purchase Agreement) with the Purchaser and KAOS Capital Ltd. (the Guarantor) with respect to the proposed distribution (the Offering) of Shares (the Distribution Shares);

14. Pursuant to the Equity Purchase Agreement, the Purchaser has agreed to purchase, and the Issuer has the right, but not the obligation, exercisable from time to time for a period of 37-months following the later of (i) the date Shareholder Approval is received and (ii) the date of this decision (theCommitment Period), to issue and sell, up to $180,000,000 (the Maximum Commitment Amount) of Shares (the Put Shares);

15. The Purchaser's performance of all of its obligations, covenants and agreements arising from the Equity Purchase Agreement is guaranteed by its affiliate, the Guarantor, who covenants and agrees to be jointly and severally liable with the Purchaser under the Equity Purchase Agreement;

16. The Equity Purchase Agreement will provide the Issuer with the ability to raise capital as needed, from time to time;

17. Under the Equity Purchase Agreement, the Issuer will, subject to paragraph 18, be entitled to deliver to the Purchaser, in each calendar month during the Commitment Period, a put notice (a Put Notice), which notice shall (i) notify the Purchaser of its intention to draw down funds under the equity line established pursuant to the Equity Purchase Agreement (the Equity Line) and (ii) specify the amount of the proposed draw down; provided however that the Put Notice must be delivered during the first five days on which the TSX is open for business (Trading Days) of such calendar month (the Eligible Period), except for the first Put Notice, which may be delivered to the Purchaser by the Issuer, in its sole discretion, during the first ten Trading Days immediately following the date hereof;

18. The Issuer may not deliver a Put Notice during the period beginning ten Trading Days before the Issuer's next subsequent annual financial statements or quarterly financial statements are to be publicly released and ending two Trading Days after such statements are released, or during any other period in which the Issuer is in possession of material non-public information (the Blackout Period). In the event that any day (an Eligible Day) forming part of the Eligible Period is within the Blackout Period, the Eligible Period will be extended by one day for each Eligible Day that is within the Blackout Period (subject in each case to the restrictions set forth in paragraph 19);

19. The maximum amount that the Issuer will be entitled to draw down pursuant to any Put Notice (the Put Amount) shall be the lesser of (i) the remaining portion of the Maximum Commitment Amount and (ii) $5,000,000; provided that, if the Issuer does not draw down such amount in full during the Eligible Period of a particular calendar month (the First Month) then the maximum Put Amount for the subsequent calendar month (the Second Month) shall be the lesser of (i) the remaining portion of the Maximum Commitment Amount and (ii) $5,000,000 plus an amount equal to (A) $5,000,000 less (B) the aggregate purchase price for all Put Shares issued in connection with the draw down for the First Month (the Additional Put Amount). If the Issuer does not draw down such Additional Put Amount in the Second Month, then all rights of the Issuer to draw down such Additional Put Amount shall be forfeited provided that a new Additional Put Amount may result if the Put Amount for the Second Month is less than $5,000,000.

20. The subscription price of the Put Shares to be issued pursuant to the Put Notice (the Purchase Price) will equal 93% of the volume weighted average price (VWAP) of the Shares on the TSX during the twenty consecutive Trading Days immediately following the date the Put Notice is deemed delivered (the Pricing Period); provided, however, that the subscription price per Put Share: (i) shall not be less than $0.10 for the first three months of the Commitment Period and (ii) shall not be less than $0.30 for the remainder of the Commitment Period;

21. Within two Trading Days of the end of the Pricing Period, the Issuer shall provide written notice (the Calculation Notice) of its calculations of the Purchase Price per Share for the respective Put Shares subject to the Put Notice, and shall determine the number of Put Shares to be issued pursuant to the Put Notice by dividing the Put Amount by the Purchase Price per Share rounded down to the nearest full Share. The Issuer shall provide supporting details of such calculations to the Purchaser for review and confirmation as soon as reasonably possible following the Pricing Period;

22. On a date which is two Trading Days following the delivery of the Calculation Notice (a Closing Date), the Purchaser shall deliver to the Issuer the aggregate Purchase Price against delivery of the relevant number of Put Shares to be issued by the Issuer. The Put Shares to be issued by the Issuer on the Closing Date will be freely tradeable Shares, issued without, and not subject to, any conditions contemplated by section 2.5(2) of Regulation 45-102 respecting Resale of Securities (chapter V-1.1, r.20) (Regulation 45-102) and otherwise free and clear of all liens;

23. The Equity Purchase Agreement provides that, at the time of each Closing Date, the Issuer in a closing certificate will make a representation to the Purchaser to the effect that the representations and warranties of the Issuer in the Equity Purchase Agreement are true and correct in all material respects of the date of the Equity Purchase Agreement and the Closing Date (except for the representations and warranties specifically made as of a particular date) and that each of the conditions precedent to the obligation of the Purchaser to purchase the Put Shares have been satisfied as of the Closing Date. This will include a representation to the Purchaser to the effect that the Prospectus (as defined below) did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Issuer would therefore be unable to issue Distribution Shares under the Equity Purchase Agreement when it is in possession of undisclosed information that would constitute a material fact or a material change;

24. On or after the Closing Date for any drawdown, the Purchaser may seek to sell all or a portion of the Shares issued to it pursuant to the applicable Put Notice. The Purchaser may also seek to sell all or a portion of the Initial Commitment Fee Shares (as defined below) and Additional Commitment Shares (as defined below) it may receive;

25. The Purchaser and its affiliates, associates and insiders will not hold a "net short position" in Shares during the term of the Equity Purchase Agreement. However, the Purchaser may, after the receipt of a Put Notice, seek to short-sell Put Shares to be subscribed for pursuant to the Put Notice, or engage in hedging strategies, in order to reduce the economic risk associated with its commitment to subscribe for Put Shares, provided that:

(a) the Purchaser complies with applicable rules of the TSX and applicable securities regulations;

(b) the Purchaser and its affiliates, associates or insiders will not during the period between a Put Notice and the corresponding Closing Date, directly or indirectly, sell Shares or grant any right to purchase or acquire any right to dispose of, nor otherwise dispose for value of, any Shares or any securities convertible into or exchangeable for Shares, in an amount exceeding the number of Put Shares to be subscribed by the Purchaser pursuant to the applicable Put Notice; and

(c) the Purchaser and its affiliates, associates or insiders, will not, directly or indirectly sell Shares or grant any right to purchase or acquire any right to dispose of, nor otherwise dispose for value of, any Shares or any securities convertible into or exchangeable for Shares, between the time of delivery of a Put Notice and the filing of the news release announcing the issuance of such Put Notice.

26. The Equity Purchase Agreement provides that the obligation of the Purchaser to purchase the Put Shares pursuant to the applicable Put Notice is subject to the applicable shareholder approval requirements of the TSX pursuant to the TSX Company Manual (Shareholder Approval). The Issuer would therefore, unless it obtains Shareholder Approval, be unable to issue Shares under the Equity Purchase Agreement to the Purchaser where (i) the issuance of such Shares materially affects control of the Issuer, (ii) the number of Shares to be issued is greater than 25% of the number of securities of the Issuer which are outstanding and (iii) the Purchase Price for the Shares is lower than the market price;

27. the Purchaser has confirmed to the Issuer that it does not anticipate holding more than 20% of the common shares of the Issuer;

28. The Issuer will include in the Prospectus Supplement, the following risk factors: (a) that the Purchaser may engage in resales or other hedging strategies to reduce or eliminate investment risks associated with a draw down and that such risk factor will disclose the possibility that such transactions could have a significant effect on the price of the Shares, (b) that the transactions contemplated by the Equity Purchase Agreement may result in significant dilution to existing shareholders of the Issuer and (c) that the Purchaser may sell Shares issued to them pursuant to the Equity Purchase Agreement during its term and that such sales may have a significant effect on the price of the Shares;

29. No extraordinary commission or consideration will be paid by the Purchaser to a person or company in respect of the dispositions of Distribution Shares by the Purchaser to purchasers who acquire them from the Purchaser;

30. The Issuer has agreed to pay a commitment fee by issuing to the Purchaser the following Shares: (a) 10,843,373 Shares (Initial Commitment Fee Shares), subject to the restriction contemplated by Regulation 45-102, immediately following the TSX's approval of the transaction, and (b) if the VWAP of the Shares for the five Trading Days ending on the last day of the restricted period applicable to the Initial Commitment Fee Shares as provided under Regulation 45-102, being the date that is four months and one day following the date of issuance of the Initial Commitment Fee Shares (the Restricted Date) is less than $0.489 (the Floor Price), such number of Shares (the Additional Commitment Shares) equal to (A) the Initial Commitment Fee Shares multiplied by (B) the number that is equal to the Floor Price divided by the VWAP per Share for the five Trading Days ending on the Restricted Date and (C) less the Initial Commitment Fee Shares;

31. In effecting any re-sales of the Distribution Shares, the Purchaser will not engage in any sales, marketing or solicitation activities of the type undertaken by dealers or underwriters in the context of a public offering. More specifically, the Purchaser will not (a) advertise or otherwise hold itself out as a dealer, (b) purchase or sell securities as principal from or to customers, (c) carry a dealer inventory in securities, (d) quote a market in securities, (e) extend or arrange for the extension of credit in connection with securities transactions, (f) run a book of repurchase and reverse repurchase agreements, (g) use a carrying broker for securities transactions, (h) lend securities for customers, (i) guarantee contract performance or indemnify the Issuer for any loss or liability from the failure of the transaction to be successfully consummated, (j) participate in a selling group, (k) effect any disposition of Distribution Shares which would not be in compliance with the securities legislation of any jurisdiction of Canada or the securities laws of the United States, (l) provide investment advice or (m) issue or originate securities;

32. The Purchaser will not solicit offers to purchase Distribution Shares in any jurisdiction of Canada and all sales of Distribution Shares through the facilities of TSX or another Canadian exchange recognized or exempted from recognition by the securities regulatory authority or regulator in a jurisdiction of Canada (each, a Recognized Exchange), will be completed through registered dealer(s) unaffiliated with the Purchaser or the Issuer;

The Base Shelf Prospectus and Prospectus Supplements

33. The language required to be included in a base shelf prospectus (except for the existing Base Shelf Prospectus) pursuant to Subsection 5.5(2) and 5.5(3) of Regulation 44-102 will be qualified, in each case, by adding "except in cases where an exemption from such delivery requirements has been obtained" to the end of the required disclosure;

34. The Issuer intends to file the Prospectus Supplement as soon as practicable and in any event not later than the applicable Closing Date describing the Offering (the Initial Supplement) and additional Prospectus Supplements containing pricing information in connection with each draw under the Equity Line (each, a Pricing Supplement, and collectively with the Base Shelf Prospectus and Prospectus Supplement, the Prospectus);

35. The Prospectus Supplement will disclose (i) the Maximum Commitment Amount, (ii) the formula to calculate the Purchase Price, (iii) the purchase price per Additional Commitment Share, if applicable, (iv) certain other information required by Regulation 44-101 omitted from the Base Shelf Prospectus in accordance with Regulation 44-102 and (v) the following statement, which will also be included in the Pricing Supplement:

Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment are not delivered to the purchaser, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. However, such rights and remedies will not be available to purchasers of common shares distributed under this Prospectus Supplement because the Prospectus, the Prospectus Supplement and the relevant Pricing Supplement, will not be delivered to purchasers, as permitted under a decision document issued by the Autorité des marchés financiers on •, 2022.

Securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contain a misrepresentation, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. Other than in respect of the Purchaser, such remedies remain unaffected by the non-delivery of the prospectus, as permitted under the decision document referred to above.

The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's jurisdiction for the particulars of these rights or consult with a legal adviser.;

(the Amended Statement of Rights)

36. The Prospectus will (a) qualify the distribution of Distribution Shares to the Purchaser on the Closing Date disclosed in the Pricing Supplement; and (b) qualify the distribution of Distribution Shares to purchasers in Canada who purchase them from the Purchaser through the TSX or another Recognized Exchange through registered dealer(s) engaged by the Purchaser (the Recognized Exchange Purchasers) during the period that commences on the Closing Date and ends on the earlier of (i) the date on which the distribution of such Shares has ended or (ii) the 40th day following the relevant Closing Date (collectively, a Distribution);

37. The Prospectus Delivery Requirement is not workable in the context of a Distribution because the Recognized Exchange Purchasers will not be readily identifiable as the dealer(s) acting on behalf of the Purchaser may combine the sell orders made under the Prospectus with other sell orders and the dealer(s) acting on behalf of the Recognized Exchange Purchasers may combine a number of purchase orders;

38. Each Prospectus Supplement will contain an underwriter's certificate in the form set out in section 2.2 of Appendix B to Regulation 44-102 signed by the Purchaser;

39. At least three business days prior to the filing of the Initial Supplement to be filed as described in paragraph 34, the Issuer will provide for comment to the Decision Makers a draft of the Initial Supplement and the form of Pricing Supplement;

Continuous Disclosure

40. After execution of the Equity Purchase Agreement, the Issuer:

(a) promptly issued and filed a news release disclosing the Equity Purchase Agreement and disclosing the material terms thereof, including reiterating maximum amount of any draw down, the Maximum Commitment Amount, the Commitment Period, the Initial Commitment Fee Shares, and the formula to calculate the Purchase Price, and

(b) within ten days:

(i) filed a material change report disclosing, at a minimum, the information required in paragraph 40 (a); and

(ii) filed a copy of the Equity Purchase Agreement on SEDAR;

41. The Issuer undertakes to forthwith issue and file a news release:

(a) immediately following delivery of a Put Notice to the Purchaser: (i) announcing the delivery of the Put Notice, the amount of the draw down, the pricing formula and the minimum price; and (ii) stating that the applicable and relevant base shelf prospectus, Prospectus Supplement and Pricing Supplement (collectively, the Final Prospectus) is or will be, as the case may be, available on SEDAR; and

(b) immediately following each closing of the purchase and sale of Put Shares: (i) announcing the closing of the draw down, the number of Put Shares issued and the price per Put Share; and (ii) stating that the Final Prospectus is available on SEDAR;

42. The Issuer shall file a material change report if an issuance of Put Shares constitutes a material change disclosing, at a minimum, the information required in paragraph 41 (a) above;

43. In the event of: (i) the termination of the Equity Purchase Agreement; or (ii) a change in (A) the Maximum Commitment Amount; or (B) the formula to calculate the Purchase Price, the Issuer undertakes to:

(a) promptly issue and file on SEDAR a news release disclosing such information and:

(i) that the applicable and relevant base shelf prospectus, the Prospectus Supplement and each Pricing Supplement will be available on SEDAR and specifying how a copy of these documents can be obtained; and

(ii) the Amended Statement of Rights; and

(b) within ten days, file a material change report with respect to such event if it constitutes a material change under applicable securities legislation;

44. The Issuer will disclose in its financial statements and management's discussion and analysis filed on SEDAR pursuant to Regulation 51-102 respecting Continuous Disclosure Obligations (chapter V-1.1, r.24), for each financial period:

(a) the number and price of Put Shares issued to the Purchaser pursuant to the Equity Purchase Agreement; and

(b) that the applicable and relevant base shelf prospectus, the Prospectus Supplement and the relevant Pricing Supplements are available on SEDAR and specifying where and how a copy of these documents can be obtained;

Deliveries upon request

45. The Issuer will deliver to the Decision Makers and to the TSX, upon request, a copy of each Put Notice delivered by the Issuer to the Purchaser under the Equity Purchase Agreement;

46. The Purchaser will provide to the Decision Makers, upon request, full particulars of trading and hedging activities by the Purchaser (and, if required, trading and hedging activities by its affiliates, associates, partners or insiders) in relation to securities of the Issuer during the term of the Equity Purchase Agreement;

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted, provided that:

(a) the number of Shares distributed by the Issuer under the Equity Purchase Agreement will not exceed, in any 12-month period, 19.9% of the aggregate number of Shares outstanding calculated at the beginning of such period;

(b) at the time of delivery of a Put Notice to the Purchaser, the Issuer has an active base shelf prospectus, for which a receipt has been issued, to qualify the distribution of Distribution Shares;

(c) as it relates to the Prospectus Disclosure Requirements, the Issuer complies with the representations in paragraphs 23, 28, 33, 34, 35, 36, 39, 41, 43, 44, 45 and 46 and the Purchaser complies with the representations in paragraph 38;

(d) as it relates to the Registration Requirement and the Prospectus Delivery Requirement, the Purchaser complies with the representations in paragraphs 29, 31, 32, 38 and 46; and

(e) this decision will terminate 37 months and one day from the date hereof.