CI Investments Inc. and CI Galaxy Bitcoin Fund
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions -- approval of mutual fund merger -- approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- merger will occur on a taxable basis -- merger otherwise comply with pre-approval criteria, including securityholder vote, IRC approval -- securityholders provided with timely and adequate disclosure regarding the mergers.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b) and 19.1(2).
May 4, 2021
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 Manager) AND CI GALAXY BITCOIN FUND (the Terminating Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger (the Merger) of the Terminating Fund into CI Galaxy Bitcoin ETF (the Continuing Fund, and collectively with the Terminating Fund, the Funds) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Merger Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Manager 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 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 Manager:
The Manager and the Funds
1. The Manager is a corporation amalgamated under the laws of Ontario with its head office located in Ontario. The Manager is registered as follows:
(a) under the securities legislation of all provinces and territories as a portfolio manager and an exempt market dealer;
(b) under the securities legislation of Ontario, Quebec and Newfoundland and Labrador as an investment fund manager; and
(c) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.
2. The Manager is the manager of the Funds.
3. The Terminating Fund is a closed-end fund governed by a declaration of trust under the laws of Ontario.
4. The Continuing Fund is an open-end mutual fund governed by a declaration of trust under the laws of Ontario.
5. The units of the Funds are listed on the Toronto Stock Exchange (the TSX).
6. Neither the Manager nor the Funds are in default of securities legislation in any province or territory of Canada, as applicable.
7. Each Fund is a reporting issuer under the securities legislation of each province and territory of Canada and is subject to the requirements of NI 81-102 and National Instrument 41-101 General Prospectus Requirements.
8. The Continuing Fund is an alternative mutual fund within the meaning of National Instrument 81-102 Investment Funds (NI 81-102) and has the ability to invest in asset classes and use investment strategies that are not permitted for conventional mutual funds. The Continuing Fund is subject to restrictions and practices contained in Canadian securities legislation applicable to alternative mutual funds, including NI 81-102, and is managed in accordance with these restrictions, except as otherwise permitted by exemptions provided by Canadian securities regulatory authorities.
9. The Terminating Fund offers its units in all Jurisdictions pursuant to a prospectus dated December 4, 2020. The Continuing Fund currently distributes its units in all Jurisdictions pursuant to a prospectus dated March 4, 2021, as amended.
10. The Manager has determined that the proposed Merger would not constitute a "material change", as that term is defined in National Instrument 81-106 Investment Fund Continuous Disclosure ("NI 81-106"), for the Continuing Fund.
11. The Manager will effect the proposed Merger on a taxable basis. There should be no tax impact to unitholders of the Terminating Fund who hold the fund in a registered plan. Furthermore, unitholders who did not wish to participate in the Merger were able to exercise the Merger Redemption Right (as defined herein) prior to the Meeting (as defined herein). Effecting the Merger on a taxable basis will appropriately allocate capital gains to the Terminating Fund's unitholders, who took part in the appreciation of bitcoin since the launch of the Terminating Fund and had the opportunity to consider and vote on the Merger.
Reason for Merger Approval
12. Regulatory approval of the Merger is required because the Merger complies with all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, except that the Merger will not be a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the Income Tax Act) or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Income Tax Act.
The Proposed Merger
13. The proposed Merger was announced in the following documents, each of which has been filed on SEDAR:
(a) a press release dated March 8, 2021; and
(b) a material change report dated March 9, 2021.
14. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager presented the terms of the Merger to the independent review committee of the Terminating Fund (the IRC) for its review. The IRC determined that the Merger, if implemented, will achieve a fair and reasonable result for the Terminating Fund.
15. The Manager convened a special meeting of the unitholders of the Terminating Fund in order to seek the approval of the unitholders of the Terminating Fund to complete the Merger (the Meeting), as required by paragraph 5.1(1)(f) of NI 81-102. The Meeting was held on April 26, 2021 and a majority of the unitholders of the Terminating Fund approved the Merger.
16. The Manager has concluded that the Merger is not a material change to the Continuing Fund, and accordingly, there is no intention to convene a meeting of unitholders of the Continuing Fund to approve the Merger pursuant to paragraph 5.1(1)(g) of NI 81-102.
17. By way of order dated July 28, 2017, the Manager was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of NI 81-106 to send a printed management information circular to unitholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such unitholders. In accordance with the Manager's standard of care owed to the Terminating Fund pursuant to securities legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent with the purposes of notice-and-access (as described in the Companion Policy to NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the Meeting and whether the Terminating Fund would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
18. Pursuant to requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the Meeting, along with the ETF facts of the Continuing Fund, were mailed to unitholders on or about March 24, 2021 and, concurrently, were filed via SEDAR. The management information circular (the Circular), which the notice-and-access document provides a link to, were filed via SEDAR at the same time.
19. It is intended that the Merger will occur after the close of business on or about May 7, 2021 (the Effective Date). The Manager therefore anticipates that each unitholder of the Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound-up as soon as reasonably possible following the Merger.
20. The tax implications of the Merger as well as the differences between the Terminating Fund and the Continuing Fund and the IRC's recommendation of the Merger are described in the Circular, so that unitholders may make an informed decision before voting on whether to approve the Merger. The Circular also describes the various ways in which unitholders can obtain a copy of the prospectus of the Continuing Fund.
21. Any unitholder of the Terminating Fund who does not wish to participate in the Merger had the opportunity to surrender his or her units for redemption prior to the Effective Date, such right being subject to the approval of the Merger (the Merger Redemption Right). The redemption price will be paid in U.S. dollars and redeeming unitholders will receive a redemption price per Class A unit equal to 100% of the net asset value per Class A unit as determined on the Effective Date, less any costs and expenses incurred by the Terminating Fund in order to fund such redemption. This Merger Redemption Right was described in the Circular.
22. The costs of effecting the Merger (consisting primarily of legal and regulatory fees, and proxy solicitation, printing and mailing costs) will be borne by the Manager.
23. No sales charges will be payable by unitholders of the Terminating Fund in connection with the Merger.
24. The investment portfolio and other assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be, acceptable, on or prior to the Effective Date, to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objective of the Continuing Fund.
Merger Steps
25. The specific steps to implement the Merger are as follows:
(a) The value of the Terminating Fund's investment portfolio and other assets will be determined at the close of business on the effective date of the Merger in accordance with the constating documents of the Terminating Fund.
(b) The Manager does not expect any income or capital gains distributions to be made to unitholders of the Terminating Fund or the Continuing Fund.
(c) The Terminating Fund will transfer substantially all of its assets to the Continuing Fund. In return, the Continuing Fund will issue to the Terminating Fund U.S. dollar-denominated unhedged units of the Continuing Fund (TSX: BTCX.U) (the ETF US$ Series Units) having an aggregate net asset value equal to the value of the assets transferred to the Continuing Fund.
(d) The Continuing Fund will not assume liabilities of the Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the effective date of the Merger.
(e) Immediately thereafter, the ETF US$ Series Units received by the Terminating Fund will be distributed to unitholders of the Terminating Fund in exchange for their units in the Terminating Fund on a dollar-for-dollar basis.
(f) The Terminating Fund's units will be de-listed from the TSX and the Terminating Fund will cease to be a reporting issuer in each of the provinces and territories of Canada.
(g) The Terminating Fund will be wound-up promptly following its Merger.
26. The result of the Merger will be that investors in the Terminating Fund will cease to be unitholders of the Terminating Fund and will become unitholders of the Continuing Fund, and the Continuing Fund will continue as an exchange-traded mutual fund listed on the TSX.
Benefits of the Merger
27. In the opinion of the Manager, the Merger will be beneficial to unitholders of the Terminating Fund for the following reasons:
(a) the Continuing Fund has the benefit of posted two-way markets due to market-making activities by designated brokers and dealers. Accordingly, units of the Continuing Fund can be expected to trade at a market price approximately equal to their intrinsic net asset value. In comparison, the Terminating Fund's trading price per unit typically differs from its net asset value per unit, at times materially, without the redemption / creation feature of an exchange-traded fund or ETF.
(b) the Continuing Fund will have continuous opportunities to increase its asset base (as compared to a closed-end fund), thereby providing it with the potential to achieve the benefits of economies of scale by spreading its operating costs over more units; and
(c) the Terminating Fund and the Continuing Fund are subject to the same annual management fee of 0.40%. Pursuant to a press release dated February 26, 2021, CI announced that the Terminating Fund's management fee would be reduced to match the management fee of the Continuing Fund when the Continuing Fund was launched (which occurred on March 9, 2021).
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 Merger Approval is granted.