Ontario’s securities watchdog has suspended the registration of asset manager Emerge Canada Inc. after finding it failed to comply with working capital requirements, and the regulator expects the manager to wind down its funds.
The Ontario Securities Commission announced Thursday it has suspended exchange-traded funds provider Emerge Canada from being an investment fund manager, a portfolio manager and an exempt market dealer after finding the company is essentially insolvent.
The OSC says Emerge Canada’s U.S. parent owes its Canadian subsidiary millions of dollars that the subsidiary has failed to collect. The commission says Emerge Canada can’t count that money owed as part of its working capital.
In turn, Emerge Canada owes $5.5-million to its own ETFs – an amount far higher than disclosed on its most recent financial statements.
In its decision, the OSC said that before that suspension takes effect, it has imposed interim terms and conditions to restrict Emerge Canada from conducting any registrable activities, except those necessary for an orderly wind-down of its funds.
“Emerge Canada is considering its next steps in light of this decision,” the firm said in an e-mail to The Globe and Mail.
The OSC notice did not provide details on how the suspension would impact Emerge Canada’s clients, such as whether there will be a monetary impact to the funds, as well as how long investors will have to wait before they can access their funds.
Last month, the OSC surprised investors when it imposed a temporary trading halt on the company’s funds. At the same time, The Globe reported that Emerge Canada, which manages about $118-million in assets, owed a total of $2.53-million to its six Emerge ARK funds.
The group of investment funds is linked to prominent U.S. investor and ARK Investment Management LLC chief executive officer Cathie Wood. ARK is a subadviser to U.S.-based Emerge Capital Management Inc., which in turn is a subadviser to Emerge Canada.
The OSC decision reveals for the first time that Emerge Canada is short of cash because it hasn’t collected money from Emerge Capital. The amount totalled about $4.5-million as of last Sept. 30, and about $3.4-million as of March 31, the OSC said.
The commission said Emerge Canada has been calculating its available working capital by including those amounts as a receivable – a current asset that’s easily collectible.
As part of its registration as an investment fund manager, Emerge Canada is required to maintain a minimum capital level of $100,000. Emerge Canada told the OSC that its working capital was just $12,819, as of Sept. 30, 2022. Subtracting the receivable takes Emerge Canada to a working capital deficit of nearly $4.5-million, the OSC said.
“Staff contends that firms without sufficient working capital cannot be permitted to continue to operate for extended periods of time, without placing investors at risk and diminishing public confidence in Ontario’s capital markets,” Debra Foubert, director of compliance and registrant regulation branch at the OSC, wrote in the decision.
Part of the terms of conditions announced by Ms. Foubert allow Emerge Canada, as part of the wind-down of its business as a registered firm, to make ”prompt arrangements” for another appropriately registered firm to “assume responsibility for the registerable activities currently being performed by Emerge Canada in respect of the funds.”
The company first ran into issues last year, when Emerge Canada revealed in mid-December that nearly six weeks earlier, BDO Canada LLP had resigned as the auditor of its funds. At the time, Emerge Canada said it was “working expeditiously to appoint a successor auditor.”
Founded by chief executive officer Lisa Langley, Buffalo, N.Y.-based Emerge Capital operates in New York and Toronto. The company began to gain traction in Canada in 2019 when it became the Canadian distributor for funds affiliated with ARK. Ms. Wood, ARK’s charismatic CEO, made frequent media appearances promoting Tesla Inc. and other high-growth stocks.
In Emerge Canada’s submissions to the OSC, Ms. Langley indicated that Emerge Capital needs to raise funds in order to pay the money owed to Emerge Canada. Both Ms. Langley and Emerge Capital made repeated attempts to raise funds but, to date, no transaction has been completed that would fully cover the amounts owing.
The submissions identified several unsuccessful attempts by Emerge Capital to raise the funds, including the potential sale of a stake in Emerge Capital to a venture capital company.
On Dec. 30, 2022, counsel for Emerge Canada informed the OSC that Emerge Capital obtained a revolving line of credit for US$6-million from Universal Funding Group, a U.S. lender. Emerge Capital did not provide a reason why the debt was not repaid at that time.
Ms. Langley also said in an affidavit that a separate loan arrangement was established that would see US$5-million in short-term bonds transferred from a U.K. institutional investor, United General OpCo Ltd., to Emerge Capital.
Upon receipt of the bonds, Ms. Langley said her firm “will redeem [the bonds] immediately to cash,” and Emerge Capital would use the proceeds to repay the amount owning. On March 17, Emerge Canada and Emerge Capital entered into a term loan agreement to receive US$5-million from the United General OpCo Ltd.
However, instead of receiving cash, Emerge Capital received a transfer of Antigua Barbuda government bonds, available for trading as of April 11, 2023. But since receipt, Emerge Capital has been attempting to sell the bonds, which are traded over the counter and require the firm to find an institutional buyer.
In a statement to the OSC, Emerge Canada said suspending the firm and requiring the windup of the Emerge ETFs is “overly punitive and is unwarranted in the circumstances,” and would not be in the best interest of unitholders as “Emerge Canada owes a receivable of approximately $5.5-million” to the Emerge ARK ETFs. The company added that “forcing a sale of the assets of the funds may occur at liquidation values.”
Emerge Canada said suspension is not warranted because it is a relatively new registrant and it fills a unique niche in the ETF market, saying it is North America’s first all-female investment team managing innovative and socially responsible investment strategies.
Also, the forced liquidation of the Emerge ETFs could have reputational damage not only to Emerge Canada, but to other small ETF providers and ETFs in general. In addition, the current market for obtaining financing is difficult, the company said.
Ms. Foubert said in her decision that Emerge Canada has been provided “ample opportunity to remedy its working capital deficiency” and even if the outstanding amount owing is paid in full, Emerge Canada will remain deficient in its working capital, unless other sums that qualify as working capital are obtained.
“While I applaud the fact that Emerge is breaking ground as North America’s first all-women investment team managing innovative and socially responsible investment strategies, it did not form any part of my decision as the regulatory requirements apply equally to all registrants, in the absence of specific exemptions,” Ms. Foubert added.