Regulators have suspended the registration of a Canadian fund manager who failed to deposit certified accounts in time and ordered him to liquidate his exchange-traded funds or transfer them to another manager.
The move to suspend Toronto-based Emerge Canada, which billed itself as “Canada’s first and only female-owned investment fund firm,” comes after the discovery of a very unusual financial arrangement for which Emerge Canada owes ETFs about C$5.5 million ($4.1 million), according to the Ontario Securities Commission.
The regulator on Thursday suspended Emerge Canada for failing to meet minimum working capital requirements of C$100,000, a bankruptcy it says has existed since at least September 2022.
A month ago the OSC imposed an “indefinite period” trade ban on its 11 exchange traded funds after missing the March 31 deadline to file financial statements.
The ETFs, which include six vehicles designed to track the performance of technology-focused funds managed by Cathie Wood’s Ark Investthey had combined assets of C$109 million when they were hit by the trading ban, which industry insiders believe is unprecedented for an ETF anywhere in the world.
The OSC said Emerge Canada calculated its excess working capital by including a “related party receivable” owed to Emerge Capital Management, also known as Emerge US, the ETF sub-adviser, of C$3.4 million , starting March 31st.
The OSC determined that this cannot be counted as a current asset on its balance sheet because it is unable to realize that asset within 12 months as it depends on Emerge US’s ability to pay the credit or money owed.
Even including this credit, Emerge Canada’s working capital was just C$12,819 on Sept. 30 of last year, the regulator said. In addition, the company’s investment account also included 1.5 million cryptocurrency tokens, which according to the OSC should be devalued by 100% to reflect their inherent risk.
As a result, the regulator said Emerge Canada had a working capital shortfall of C$4.5 million as of Sept. 30.
According to the OSCEmerge US’s attempts to raise the funds needed to pay off the credit have been unsuccessful. In February, Lisa Langley, chief executive officer of Emerge Canada, said that Emerge US had secured a $5 million loan in short-term bonds from a British firm, United General OpCo Ltd, which Langley said would be “redeemed immediately cash”. .
The bonds turned out to be issued by the government of the small Caribbean nation of Antigua and Barbuda. Though he’s been trying to sell them since April 11, he hasn’t been able to because “the bonds are trading over-the-counter and Emerge US needs to find an institutional buyer,” the regulator said.
Emerge Canada said in a brief statement that it is “evaluating its next steps in light of this decision.” United General OpCo Ltd could not be contacted immediately for comment.
The OSC statement said Emerge Canada argued that suspending the firm and requiring the liquidation of Emerge ETFs was excessively punitive, unwarranted and not in the best interests of unitholders, due to outstanding debt, while “forcing a sale of the fund assets may occur at liquidation values.
Emerge Canada said the suspension was also unwarranted because it was a relatively new company “and fills a unique niche in the ETF market” as “North America’s first all-female investment team managing innovative and socially responsible investment strategies “.
Additionally, the enforced liquidation of ETFs could cause “reputational damage” to other smaller ETF providers,” he said.
However, Debra Foubert, director of the OSC’s registrant compliance and regulatory department, said that while she “applauded that Emerge is leading the way. . . the regulatory requirements apply equally to all registrants.
“Emerge Canada violates Ontario securities law. It continues to be short of working capital and there is no timeline or certainty as to when Emerge Canada will become compliant.
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