Regulators have suspended the registration of a Canadian fund manager that failed to file audited accounts on time and ordered it to wind up its exchange traded funds or transfer them to a different manager.
The move to suspend Toronto-based Emerge Canada, which billed itself as “Canada’s first and only woman-owned investment fund firm”, comes after the discovery of a highly unusual financial arrangement whereby Emerge Canada owes the ETFs approximately C$5.5mn ($4.1mn), according to the Ontario Securities Commission.
The regulator on Thursday suspended Emerge Canada for its failure to meet minimum working capital requirements of C$100,000, a failure it said has existed since at least September 2022.
A month ago the OSC imposed an “indefinite” trading ban on its 11 exchange traded funds after the failure to meet the March 31 filing deadline for financial statements.
The ETFs, which include six vehicles designed to replicate the performance of technology-focused funds managed by Cathie Wood’s Ark Invest, had combined assets of C$109mn when they were hit by the trading ban, believed by industry experts to be unprecedented for an ETF anywhere in the world.
The OSC said Emerge Canada had been calculating its excess working capital by including a “related-party receivable” owed to it by Emerge Capital Management, also known as Emerge US, the sub-adviser to the ETFs, of C$3.4mn, as of March 31.
The OSC ruled this could not be counted as a current asset on its balance sheet because it is unable to realise this asset within 12 months as it is dependent upon the ability of Emerge US to pay the receivable, or money owed.
Even including this receivable, Emerge Canada’s working capital was just C$12,819 on September 30 last year, the regulator said. Moreover, the company’s investment account also included 1.5mn cryptocurrency tokens, which the OSC said should be written down by 100 per cent to reflect their inherent risk.
As a result, the regulator said Emerge Canada had a working capital deficit of C$4.5mn as of September 30.
According to the OSC, Emerge US’s attempts to raise the funds it needs to pay off the receivable have been fruitless. In February, Lisa Langley, chief executive of Emerge Canada, said Emerge US had secured a loan of US$5mn worth of short-term bonds from a UK company, United General OpCo Ltd, which Langley said would be “redeemed immediately to cash”.
The bonds turned out to be issued by the government of the small Caribbean nation of Antigua and Barbuda. Despite attempting to sell them since April 11, it has been unable to do so as “the bonds are traded over-the-counter and Emerge US needs to locate an institutional buyer”, the regulator said.
Emerge Canada said in a brief statement that it “is considering its next steps in light of this decision”. United General OpCo Ltd could not be immediately contacted for comment.
The OSC statement said Emerge Canada argued that suspending the firm and requiring the wind-up of the Emerge ETFs was overly punitive, unwarranted and not in the best interests of unit-holders, due to the outstanding debt, while “forcing a sale of the assets of the funds may occur at liquidation values.”
Emerge Canada said the suspension was also unwarranted because it was a relatively new company “and it fills a unique niche in the ETF market” as “North America’s first all-women investment team managing innovative and socially responsible investment strategies”.
Moreover, forced liquidation of the ETFs could cause “reputational damage” to other small ETF providers,” it argued.
However, Debra Foubert, director of the compliance and registrant regulation branch of the OSC, said that while she “applauded the fact that Emerge is breaking ground . . . the regulatory requirements apply equally to all registrants.
“Emerge Canada is in breach of Ontario securities law. It continues to be working capital deficient, and there is no timeline or certainty as to when Emerge Canada will bring itself into compliance.”