On November 21, 2013, the securities commissions of each of the Canadian provinces (except Ontario and Newfoundland and Labrador) issued for comment a new prospectus exemption for companies listed on the TSX Venture Exchange. If adopted, the exemption will allow companies to raise money by issuing shares to existing shareholders without a prospectus or other offering document. This could prove to be a major addition to the current prospectus exemptions.
At present, when listed companies wish to raise money without preparing and filing a prospectus, there are a limited number of prospectus exemptions available. Typically, a listed company will issue shares or other securities to "accredited investors" (for example, an investor who earns at least C$200,000 a year) or to an investor who subscribes for at least C$150,000, payable at closing. Other prospectus exemptions, less rarely used, include an issuance by way of offering memorandum (except in Ontario), subject to certain conditions.
The new exemption, if adopted in its current form, will apply only to companies listed on the TSX Venture Exchange. The exemption will allow such companies to issue shares or other securities to existing shareholders without a prospectus, subject to a number of conditions. The proposed conditions include the following:
- The listed company must be up-to-date in filing its continuous disclosure documents as a "reporting issuer".
- The securities to be issued must already be listed on the TSX Venture Exchange (such as common shares) or be a unit comprised of a listed security and a warrant (such as a common share and a warrant).
- The listed company must issue a press release announcing the proposed share issuance, including the minimum and maximum number of securities to be issued, the minimum and maximum gross proceeds from the distribution and the proposed principal use of proceeds, including estimated dollar amounts.
- Each purchaser under this exemption must confirm in writing to the listed company (for example, in a subscription agreement) that the purchaser held securities of the same class as that being issued as of the "record date", and continues to hold such securities. In other words, if the listed company is issuing common shares, the purchaser must have held common shares of the company on the "record date" for the distribution, and must hold common shares of the company on the closing date of the distribution. The securities commissions have not yet determined the "record date" for distributions, but it will be prior to the date of the press release first announcing the distribution.
- Unless the purchaser has received advice from a registered investment dealer, the aggregate amount invested by the purchaser in securities of the listed company under this exemption in the last 12 months cannot exceed C$15,000. In other words, unless the purchaser receives such advice, he/she is limited to investing C$15,000 in the issuing company under this prospectus exemption in any one-year period. The same investor could invest up to C$15,000 in each of several different listed companies under this exemption in any 12-month period, and could invest more if the purchaser has received advice from a registered investment dealer.
- No offering document (such as an offering memorandum) will be required.
- Any shares or other securities issued under the proposed exemption will be subject to a standard four-month "hold period" on resale. It is worth noting that shares issued to existing shareholders under the "rights offering" prospectus exemption are not subject to a four-month "hold period" – however, in that case, the company issuing the shares must deliver a disclosure document (a rights offering circular) in prescribed form to all shareholders.
- The listed company must represent to the purchaser in the subscription agreement that its "core" continuous disclosure documents do not contain a misrepresentation, and that there are no material facts or material changes related to the listed company which have not been generally disclosed. If the representations turn out to be false, a purchaser will have a right of action against the listed company.
The provincial securities commissions have asked for comments on the proposed exemption, with a deadline of January 20, 2014.
Any proposal that will facilitate raising money by listed companies in the current market, while providing adequate protection to investors, is to be welcomed. In fact, one wonders why the commissions have waited until now to introduce the new proposal.
One of the questions asked by the commissions when the proposal was introduced was whether the exemption should be available to companies listed on other Canadian markets (such as the Toronto Stock Exchange or the Canadian National Stock Exchange – CNSX). As the proposed prospectus exemption is based on the principle that purchasers are familiar with the issuing company because they are already shareholders, and the company, as a "reporting issuer", has filed continuous disclosure documents (including annual and interim financial statements, management's discussion and analysis, and management information circulars), there is no logical reason why the exemption should be limited to companies listed on the TSX Venture Exchange. In fact, there is greater disclosure available for companies listed on the Toronto Stock Exchange. They are required to file an annual information form (AIF), whereas companies listed on the TSX Venture Exchange are exempt from that requirement.
A key question will be the "record date" for the distribution, that is, the date on which a purchaser must be a shareholder in order to invest under this exemption. The securities commissions propose that the "record date" be a date prior to the press release first announcing the distribution, but have not yet determined how many days prior to the date of the press release. If the securities commissions require that an investor have been a shareholder at least 15 days or 30 days prior to the "record date" (and continue to be a shareholder), the listed company will require that the purchaser make a representation to that effect in its subscription agreement, and will issue shares to the purchaser in reliance on that representation. That being said, if the principle is familiarity with the issuing company, a "record date" set 30 days prior to the date of a press release would be reasonable.
Finally, Ontario is not at present part of this initiative. If the new prospectus exemption is adopted by all provinces except Ontario (and Newfoundland and Labrador), it will not be possible for listed companies to raise funds from shareholders in Ontario under the exemption. Further, it may be problematic for listed companies based in Ontario to raise funds from shareholders in other provinces under this exemption. It goes without saying that a harmonized prospectus exemption, available in all provinces, would be beneficial to the Canadian capital markets.
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