Canada: Deadline Approaches To Comment On Proposed Prospectus Exemption For TSXV Issuers

BACKGROUND

Under Canadian securities laws, in order to conduct a distribution of its securities, an issuer must file and receive a receipt for a prospectus or utilize a prospectus exemption. In Notice 45-312, the Canadian Securities Administrators express their belief that most TSXV issuers rarely conduct prospectus offerings due to the prohibitive time and cost involved in preparing the offering document and the additional risk of potentially wasted up-front costs in a failed offering.

The regulators also believe that while TSXV issuers commonly use the accredited investor exemption, which permits individual investors who meet certain minimum financial asset thresholds, among other things, to purchase securities without a prospectus, and that these issuers have other prospectus exemptions available to them to distribute their securities, most retail investors are not able to participate in such offerings.

As a result, retail investors are limited to purchasing securities in the secondary market, typically through the facilities of a stock exchange. Retail investors are disadvantaged in that they must pay market price instead of the discounted price typically available in private placements to accredited investors; must pay brokerage commissions; and are unable to acquire the warrant "sweeteners" which are often issued with shares in private placements to accredited investors. This also results in TSXV issuers being denied access to retail investors as a source of capital.

UNDERLYING CONDITIONS OF NEW PROPOSED EXEMPTION

The new proposed prospectus exemption, if implemented, may be relied on if the TSXV issuer has a class of equity securities listed on the TSXV and has filed all timely and periodic disclosure documents as required under applicable securities laws. If so, then the TSXV issuer may offer securities to current securityholders as of a record date set prior to the offering, so long as the offering of securities consists only of a class of equity securities listed on the TSXV or units consisting of the listed security and a warrant to acquire the listed security. The offering must also be disclosed by way of a news release which includes details of the use of proceeds. Unless an investor has obtained advice regarding the suitability of the investment from a registered investment dealer, there will be a limit of C$15,000 that may be raised from that particular investor within the preceding 12-month period. The investor must also be provided with certain rights of action against the issuer for any potential misrepresentation in the issuer's continuous disclosure record.

JURISDICTIONAL DIFFERENCES

The participating securities regulatory authorities differ in their proposed method of adopting the exemption, leading to certain jurisdictional differences.

In Alberta, Quebec and New Brunswick, statutory rights against the issuer for secondary market civil liability will be available to an investor purchasing under the exemption, and the rule – if implemented – is intended to be permanent. The British Columbia, Saskatchewan, Manitoba, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut regulators propose to enact the exemption by blanket order, and would require that an issuer give investors a contractual right of action for rescission or damages in the event of a misrepresentation in the issuer's disclosure record. In these blanket order jurisdictions, the proposed exemption would automatically expire on Dec. 31, 2015 (subject to extension).

KEY TAKEAWAYS

The new proposed prospectus exemptions will permit TSXV issuers to access capital from current shareholders in most Canadian provinces and territories.

There are potential benefits for both TSXV issuers, who could gain access to a new potential pool of capital, as well as retail investors, who would be able to purchase securities at a discount to the market price and possibly with warrants included as a "sweetener." The proposed exemption includes protections put in place with respect to maximum investment amount without suitability advice and statutory or contractual rights of action for misrepresentations. It should be noted that TSXV issuers will not be able to rely on this exemption in Ontario or Newfoundland and Labrador and this exemption will not extend to existing dealer registration requirements.

COMMENTS SOUGHT

The regulators are seeking comments on the new prospectus exemption, specifically with respect to the threshold for suitability advice, whether issuers listed on other exchanges should be able to rely on the new exemption, the appropriate timing of the record date and whether any structural requirements should be imposed with respect to pricing. Submissions must be received by Jan. 20, 2014, and those submissions will be made public.

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