Alex Gorka, François Paradis, Andrea Whyte, Desmond Lee, Rob Lando, Bastien Gauthier, , Noralee Bradley
Dec 11, 2014
The Canadian Securities Administrators (the CSA) recently published for comment proposed amendments (the CSA Proposal) designed to create a streamlined prospectus exemption for rights offerings by reporting issuers (the Proposed Rights Offering Exemption). On the same day, the Ontario Securities Commission (the OSC) announced the adoption of a new prospectus exemption that will allow reporting issuers listed on certain Canadian stock exchanges to raise capital from existing security holders on a prospectus exempt basis (the Existing Security Holder Exemption). A similar exemption was adopted by most other Canadian securities regulators earlier this year. These initiatives are intended to facilitate capital raising in the exempt market by decreasing both time and costs involved in offerings to issuers’ existing security holders, with (i) the Proposed Rights Offering Exemption allowing for larger offerings resulting in up to 100% dilution with securities issued not being subject to any hold period; and (ii) the Existing Security Holder Exemption allowing existing security holders to invest up to $15,000 per 12-month period with securities issued being subject to a four-month hold period.
Rights Offering Exemption
A rights offering is an offering by an issuer to its existing security holders, who receive rights entitling them to purchase additional securities of the issuer at what is typically a discounted price. This type of financing requires the issuer to file a prospectus unless it can rely on a prospectus exemption. Currently, there is a prospectus exemption (the Current Exemption) available if certain conditions are satisfied, including the preparation of an extensive rights offering circular and its review and acceptance by the relevant securities regulators. Under the Current Exemption, issuers cannot issue more than 25% of their already outstanding securities by way of a rights offering on a prospectus-exempt basis in any 12-month period. Given the time, costs and limitations of the Current Exemption, issuers rarely make use of it. The CSA Proposal is an attempt to address these concerns by making significant changes to the existing rights offering regime.
The Proposed Rights Offering Exemption will feature the following elements:
- Notice and Circular – Under the Proposed Rights Offering Exemption, issuers would file and send to their security holders a notice in prescribed form providing basic disclosure about the offering, and would concurrently file a new form of rights offering circular. The circular would present information in a “question and answer” format and would not have to be delivered to security holders, who would only receive the notice itself which would contain information on how to access the circular on SEDAR. Issuers will be required to certify that there are no misrepresentations in the circular. To help shorten the typical rights offering timeline, the circular would no longer have to be submitted to securities regulators for acceptance prior to the closing of the offering.
- Business Disclosure and Technical Reports – Because security holders are already familiar with the issuer’s business and have access to the insider’s continuous disclosure record, the circular would not include any disclosure about the issuer’s business. As a result, unless the issuer decides to include scientific or technical disclosure about natural resource properties in its circular, updated technical report requirements would not be triggered.
- Closing News Release – Issuers would file a closing news release containing prescribed information about the rights offering.
- Dilution Limit – The existing dilution limit would be increased from 25% to 100% assuming the exercise of all rights issued by the issuer under the Proposed Rights Offering Exemption during the preceding 12 months.
- Subscription Price – The subscription price for a security issuable on exercise of a right issued under the Proposed Rights Offering Exemption would have to be lower than: (i) for listed issuers, the market price at the time of filing the notice, and (ii) for non-listed issuers, the fair market value at the time of filing the notice.
- Security Holders Protection – The issuer would be required to make the basic subscription privilege available on a pro rata basis to all its security holders of the class of securities to be distributed upon the exercise of the rights. Under the Current Exemption, this requirement only applies to any additional subscription privilege. The Proposed Rights Offering Exemption also prescribes that secondary market disclosure liability would now apply to the acquisition of securities in a rights offering, providing investors with rights of action for damages relating to a misrepresentation in the issuer’s circular or other continuous disclosure documents.
- Stand-by Commitments – Stand-by commitments, whereby a party agrees with the issuer to purchase the securities offered in a rights offering that are not subscribed for, would still be allowed. The CSA Proposal includes an additional prospectus exemption for securities issued to a stand-by guarantor who acquires securities as principal as part of a distribution under the Proposed Rights Offering Exemption. Securities issued to the guarantor under the additional new prospectus exemption would be subject to a four-month hold period on resale.
- Non-reporting Issuers – The Proposed Rights Offering Exemption would only be available to reporting issuers (other than investment funds, which are restricted from issuing rights in any case). Non-reporting issuers would not be entitled to rely on the Proposed Rights Offering Exemption, but could still conduct rights offerings using other prospectus exemptions, such as the accredited exemption or offering memorandum exemptions.
- Minimal Connection to Canada – Currently, issuers with a minimal connection to Canada can conduct a rights offering that is exempt from both the prospectus requirements and the other existing requirements of the Current Exemption. The CSA Proposal would create a new exemption (the Minimal Connection Exemption) that would effectively continue the availability of this exemption without any substantive change. In addition to having a minimal connection to Canada, the issuer would have to, as is also currently required, file a copy of its rights offering materials with the Canadian securities regulators together with a certificate confirming that it meets the minimal connection tests, and send its rights offering materials to Canadian resident security holders concurrently with the delivery of those materials to its non-Canadian security holders. An issuer is considered to have a minimal connection to Canada if to its knowledge, after reasonable inquiry: (i) less than 10% of its beneficial shareholders are resident in Canada; (ii) less than 10% of its shares are beneficially held by residents of Canada; (iii) less than 5% of its beneficial shareholders are resident in any one province or territory of Canada; and (iv) less than 5% of its shares are beneficially held by residents of any one province or territory of Canada. Because of the difficulty in establishing beneficial ownership levels by Canadian shareholders, and the need to file and distribute materials in Canada concurrently with their distribution in other countries, we expect that many foreign issuers would continue to exclude Canadian shareholders from participation in rights offerings, or allow participation only by accredited investors pursuant to the accredited investor prospectus exemption, as is currently often the case.
The only change that the CSA Proposal would entail to rights offerings distributed by way of prospectus is that such offerings would become subject to the same pricing requirements as exempt rights offering (see Subscription Price above).
Comments in respect of the CSA Proposal are being accepted until February 25, 2015.
Existing Security Holder Exemption
On November 27, 2014, the OSC announced on November 27, 2014 the adoption of the Existing Security Holder Exemption, a new prospectus exemption. Canadian reporting issuers listed on certain stock exchanges, including the Toronto Stock Exchange and the TSX Venture Exchange, will be able to raise capital from existing security holders on a prospectus exempt basis. All other Canadian jurisdictions (except Newfoundland and Labrador) adopted a similar exemption in March 2014.
To rely on the exemption, an issuer must offer a class of listed equity securities (or of units comprised of a listed security and a warrant to acquire same) to all existing security holders holding the type of security being offered. The exemption is not available to investment funds or to issuers that are not in compliance with their continuous disclosure requirements.
An offering conducted pursuant to the Existing Security Holder Exemption does not require the filing or delivery of any offering document. Issuers must however issue an offering news release disclosing the details of the proposed offering, including plans for the use of proceeds raised. The news release must also disclose the proposed minimum and maximum number of securities to be distributed, and how over-subscriptions to the offering will be allocated.
The distribution must not result in dilution of more than 100% in the number of the issuer’s already outstanding securities of the same class, and investors are limited to investments of no more than $15,000 every 12 months unless they obtain advice in respect of the suitability of their investment. Securities distributed under the Existing Security Holder Exemption are subject to a four-month hold period on resale, and will require the issuer to file a report of exempt distribution in the prescribed form.
Assuming Ministerial approval, the Existing Security Holder Exemption will come into effect in Ontario on February 11, 2015.
By Noralee Bradley, Bastien Gauthier, Alex Gorka, Rob Lando, Desmond Lee, François Paradis, Andrea Whyte