The Ontario Securities Commission (OSC) has issued a cease trade order (CTO) against Emerge Canada for breaching minimum capital requirements.
At the heart of the matter was approximately $3.4m owed to Emerge Canada by Emerge US, a related party, treated as an asset by Emerge Canada for the purpose of its capital requirement calculations. Attempts by Emerge US to raise capital in order to repay this money were in progress, but had not been completed.
Emerge Canada does not currently have an auditor and has been unable to file audited financial statements for the most recent financial year (2022). And while the related-party receivable in question was classified as a current asset in previous financial statements, the OSC questioned Emerge Canada’s assertions that it could continue to be included as such indefinitely, particularly because it had materially increased since its initial classification.
Breached securities laws
However, it was ultimately the failure of the receivable to meet the definition of “readily convertible into cash”, as a consequence of the lengthy time “Emerge US has taken to raise the necessary funds”, that led to a finding that Emerge Canada had breached Ontario securities law and continued to be working capital deficient, with neither a timeline for nor certainty of compliance with working capital obligations.
Delivering her decision, Debra Foubert, Director, Compliance and Registrant Regulation Branch OSC, applauded Emerge for “breaking ground as North America’s first all-women investment team managing innovative and socially responsible investment strategies”, but pointed out that “regulatory requirements apply equally to all registrants”.
The decision did leave the door open for another registered firm to assume responsibility for Emerge Canada’s funds.
An interesting wrinkle addressed in the decision was the reaffirmation of the 100% reduction on all crypto assets for the purposes of calculating minimum excess working capital requirements by registered firms. In this case the 100% reduction was not initially applied by Emerge Canada in connection with 1.5m DIGau tokens held in its investment account. The OSC insisted that the 100% reduction needed to be applied in order to “account for the market risk”.
