Piles of coins

Unitholders of five Emerge Canada Inc. ETFs have become unsecured creditors of the fund manager now that the firm has failed to repay $4.7 million to the funds.

Emerge Canada was unable to pay its outstanding receivable before terminating its ETFs last month, but “continues to work towards payment to unitholders,” the manager wrote in a letter dated Jan. 5 addressed to unitholders of five of its Emerge ARK ETFs.

On May 11, the Ontario Securities Commission (OSC) suspended Emerge Canada’s registration for capital deficiency, highlighting a receivable owed to five of its Emerge ARK ETFs that had grown to $5.5 million. The receivable totalled $4.69 million as of Dec. 29, including interest.

The flagship Emerge ARK Global Disruptive Innovation ETF (EARK) and the Emerge ARK Genomics & Biotech ETF (EAGB) are owed the most, with the outstanding receivables for each fund representing about 5.6% of the net asset value (NAV) for each ETF as reported by Emerge on Dec. 15.

In dollar amounts, the EARK receivable is $3.9 million and the EAGB receivable is about $590,000.

The receivables represent between 0.55% and 1.50% of the NAV for the remaining three ETFs with money owed, or between $40,000 and $80,036. The receivable has been accruing interest at 2.5% annually since 2020.

The five Emerge ARK ETFs were fully liquidated on Oct. 31, but were terminated on Dec. 29 following the non-payment of the receivable.

The other six Emerge ETFs, including the ARK space exploration ETF, were not owed a receivable and were terminated on Dec. 20 after also being liquidated on Oct. 31.

All 11 ETFs had been untradeable since the OSC placed them under a cease-trade order (CTO) on April 6, after Emerge missed its deadline to file audited annual financial statements. The order represented the first time a CTO had been placed on a family of ETFs in Canada.

The unusual events continue with the funds’ termination. Speaking to Investment Executive last month, Dan Hallett, vice-president of research and principal with Oakville, Ont.’s HighView Asset Management Ltd., said he can’t recall another instance of unitholders becoming creditors to an ETF sponsor in the past 30 years.

Emerge Canada Inc. is the subject of a proposed class action being brought by Kalloghlian Myers LLP in Toronto, which alleges that unitholders suffered damages as a result of Emerge’s misconduct and the cease-trade order. The class action has not been certified.

Toronto-based AUM Law was appointed on Nov. 1 to monitor the wind-down of the ETFs. Following the orderly wind-down of all 11 ETFs, Emerge Canada Inc.’s registration will be fully suspended by the OSC.

Large losses

Following the liquidation announcement on Dec. 20, unitholders of the Emerge ETFs began receiving the proceeds of their investments, minus liabilities and fund expenses, and without receiving their portion of the receivable.

Several unitholders saw significant losses, largely due to the ETFs’ performance.

Frank Soodaye, a DIY investor in Mississauga, Ont. who had periodically invested in EARK between June 2022 and the cease-trade order in April 2023, told Investment Executive he received about $10,000 back on his $16,000 investment.

Manny, a DIY investor in Ontario, received about 30% of his $2,000 investment in EARK back. “It’s been a big lesson learned and an eye opener,” he said. (Investment Executive agreed to identify Manny by his first name only.)

Returns on a NAV basis for the six Emerge ARK funds between April 6, the day of the cease-trade order, and Oct. 31 ranged from -19.80% for EAGB to 2.36% for the autonomous tech and robotics ETF. The EARK fund returned -6.67%.

In its letter, Emerge stated it will arrange for any receivable payments to be made through the Canadian Depository for Securities and will notify unitholders on its website when payment has been completed.

Emerge ETFs timeline