Sprott Asset Management LP
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from s. 13.5(2)(b)(ii)(iii) of NI 31-103 to permit responsible person/associate of responsible person to purchase an insignificant amount of illiquid securities from Funds in connection with the termination of the Funds. Relief subject to conditions including IRC approval and independent pricing.
Applicable Legislative Provisions
National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5, 15.1.
May 3, 2016
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 SPROTT ASSET MANAGEMENT LP (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from section 13.5(2)(b)(i) and (ii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which prohibits an adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase or sell a security from or to the investment portfolio of i) a "responsible person" or (ii) an associate of a "responsible person", as such term is defined in NI 31-103, in order to permit the purchase of the Illiquid Securities (defined below) held by Sprott Master Fund Ltd. and Sprott Master Fund II Ltd., both investment funds managed and advised by the Filer (each, a Fund and together, the Funds) by Sprott Inc. (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 section 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, New Brunswick, Nova Scotia and Newfoundland and Labrador (together with Ontario, the Jurisdictions).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership formed and organized under the laws of the Province of Ontario with its head office in Toronto, Ontario. The general partner of the Filer, Sprott Asset Management GP Inc., is an indirect wholly-owned subsidiary of Sprott Inc., which is the sole limited partner of the Filer. As a result, Sprott Inc. is an affiliate of the Filer.
2. The Filer is registered under the securities legislation: (i) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager; (ii) in Ontario, Quebec and Newfoundland and Labrador as an investment fund manager; and (iii) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador as a dealer in the category of exempt market dealer. The Filer is also registered in Ontario as a commodity trading manager.
3. Each of the Funds is an investment fund for the purposes of the Securities Act (Ontario).
4. Each of the Funds is an exempted company incorporated pursuant to the laws of the Cayman Islands.
5. Securities of the Funds are held primarily by non-Canadian investors and by four Canadian investors who are each an accredited investor. Securities of the Funds were distributed to the Canadian investors pursuant to available exemptions from the prospectus requirements.
6. The Filer is the manager and portfolio adviser for each of the Funds.
7. Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.
8. The Filer is not a reporting issuer in any jurisdiction of Canada.
9. The investment objective of Sprott Master Fund Ltd. is to maximize absolute returns on investments while attempting to mitigate some market risk. Sprott Master Fund Ltd. intends to accomplish its set objective through superior securities selection by taking both long and short investment positions.
10. The investment objective of Sprott Master Fund II Ltd. is to maximize absolute returns on investments while attempting to mitigate some market risk. Sprott Master Fund Ltd. intends to accomplish its set objective through superior securities selection by taking both long and short investment positions.
11. The Filer has determined that, due to the reduced size of the Funds, the liquidation and wind-up of the Funds and the distribution to securityholders of the Funds of all or substantially all of the assets of the Funds would be in the best interests of the Funds and their securityholders.
12. In July 2015, investors in each Fund were provided with written notice informing them of the intention to close the Fund and begin the process of liquidating the Fund's holdings, and have been provided with written updates since then.
13. Since July 2015, the Filer has been liquidating the Funds' existing portfolio securities in an orderly manner, subject to market conditions. Proceeds from the sale of the Funds' assets are being held in cash and short-term securities, pending distribution of such assets to securityholders.
14. The Funds hold portfolio securities which are "illiquid assets" as such term is defined in National Instrument 81-102 Investment Funds (the Illiquid Securities).
15. As at April 15, 2016, the value of the Illiquid Securities held by Sprott Master Fund Ltd. was US$21,544, representing approximately 1.53% of the total value of Sprott Master Fund Ltd. and the value of the Illiquid Securities held by Sprott Master Fund II Ltd. was US$585, representing approximately 0.08% of the total value of Sprott Master Fund II Ltd.
16. In order to maximize the amount of capital that will ultimately be distributed to the securityholders of the Funds, an affiliate of the Filer, Sprott Inc., proposes to make a one-time purchase of all of the Illiquid Securities held by each of the Funds. The Filer is of the view that it will be neither practical nor economical to make a distribution "in kind" of portions of the Illiquid Securities to securityholders of the Funds since securityholders will have difficulty finding a market, if any, for these assets.
17. Certain individuals who participate in the management of the proprietary portfolio of Sprott Inc. are portfolio managers of the Filer that are involved in managing the portfolio of the Funds. Accordingly, Sprott Inc. may have access to investment decisions made on behalf of a client of the Filer or advice given to a client of the Filer and therefore be a "responsible person" as defined in section 13.5(1) of NI 31-103. In addition, Sprott Inc. beneficially owns voting securities carrying more than 10% of the voting rights of the Filer and therefore is an associate of a "responsible person" as defined in section 13.5(1) of NI 31-103.
18. Absent the Exemption Sought, the Filer is prohibited by section 13.5(2)(b) of NI 31-103 from causing a Fund to sell securities to Sprott Inc.
19. The Filer has determined that disposing of the Illiquid Securities by selling them to Sprott Inc. is appropriate for the Funds.
20. The decision to sell the Illiquid Securities on behalf of each Fund's portfolio to Sprott Inc. has been made based on the judgment of responsible persons uninfluenced by considerations other than the best interests of the Funds and the investors in the Funds.
21. The Illiquid Securities are securities of a private company that are not traded on an exchange. The Illiquid Securities will be sold by the Funds to Sprott Inc. at fair value based on an independent quote of the fair value of the Illiquid Securities obtained from an independent broker.
22. The Filer referred the purchase of the Illiquid Securities to an independent review committee ("IRC") for review. The IRC will oversee the transaction described herein after making the determinations provided under sub-sections 5.2(2)(a), (b) and (d) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), as if the Funds were subject to NI 81-107.
23. The Filer will receive no remuneration with respect to the sale of the Illiquid Securities by the Funds to Sprott Inc. With respect to the delivery of securities, the only expenses incurred by the Funds are nominal administrative charges levied by the custodian and/or recordkeeper of the Funds for recording the trades and/or any charges by a dealer in transferring the securities.
24. The Illiquid Securities are not securities of an issuer that is a related party of the Filer.
25. Each of the Funds has been audited since inception and will have final audited financial statements prepared for the year ended December 31, 2015.
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:
1. The Illiquid Securities are securities of a private company that are not traded on an exchange. The Illiquid Securities will be sold by the Funds to Sprott Inc. at fair value based on an independent quote of the fair value of the Illiquid Securities obtained from an independent broker;
2. The Filer referred the purchase of the Illiquid Securities to the IRC for review. The IRC will oversee the transaction described herein after making the determinations provided under sub-sections 5.2(2)(a), (b) and (d) of NI 81-107, as if the Funds were subject to NI 81-107;
3. The Filer receives no remuneration with respect to the sale of the Illiquid Securities by the Funds to Sprott Inc. With respect to the delivery of securities, the only expenses incurred by the Funds are nominal administrative charges levied by the custodian and/or recordkeeper of the Funds for recording the trades and/or any charges by a dealer in transferring the securities; and
4. The Funds will keep written records of the transactions reflecting details of the portfolio securities delivered by the Funds to Sprott Inc. and the value assigned to such securities, for five years after the end of the financial year, the most recent two years in a reasonably accessible place.