Canadian securities regulators in all provinces and territories except Ontario and Newfoundland and Labrador (the "Regulators") have published for comment a proposed prospectus exemption that would permit certain TSX Venture Exchange ("TSXV") listed issuers to distribute securities to existing security holders without a prospectus (the "proposed exemption"). A copy of the Regulators' notice is available here. The prospectus exemption is being considered by the Ontario Securities Commission in the commission's suite of proposed capital raising prospectus exemption reforms (see our Cassels Brock e-LERT on this topic here).
Research conducted by the Regulators reveals that TSXV issuers generally do not use prospectus offerings or avail themselves of prospectus exemptions to distribute securities to existing non-accredited retail investors. This is because of the time and cost associated with preparing the necessary documents. As a result, retail investors are limited to making additional investments in TSXV issuers via the secondary market, a practice the Regulators feel disadvantages the retail investors relative to accredited investors due to potentially higher transaction costs and relatively disadvantageous pricing/investment terms.
The proposed exemption considers allowing TSXV issuers to distribute securities to existing security holders in reliance on the issuer's continuous disclosure record, based on the following conditions:
- the issuer must have a class of securities listed on the TSXV;
- the issuer must have a current and compliant timely and periodic disclosure record;
- any offering can consist only of the class of equity securities listed on the TSXV (or units consisting of the listed security and a warrant to acquire that security);
- the issuer must publicly disclose the proposed offering in a news release and provide details on the use of proceeds, but no additional offering document (such as a prospectus) would be required;
- investors would need to confirm that they are holders of the listed security subject to a proposed offering as of a specified record date;
- investments would be limited to an aggregate of $15,000 per investor per 12 month period, unless the investor has obtained advice regarding the investment's suitability from a registered investment dealer;
- the investor must be provided with certain rights of action in the event of a misrepresentation in the issuer's continuous disclosure record; and
- where an offering document is voluntarily provided by the issuer to an investor, the investor will have certain rights of action in the event of a misrepresentation in that document.
As an additional investor protection measure, issuers relying on the proposed exemption would be required to represent to prospective purchasers that there are no material undisclosed facts or changes that relate to the issuer. As proposed, securities issued under the exemption would be subject to a four month hold period.
There is currently some difference in approach between Regulators as to how the proposed exemption would be brought into force on the provincial/territorial level. Some regulators favour the adoption of the proposed exemption as a blanket order, while others favour its adoption by way of a local rule. The method by which the proposed exemption is brought into force will have implications for statutory secondary market civil liability and on the length of time the proposed exemption remains in force. Regulators implementing by way of a blanket order would impose an "expiry" date of December 31, 2015, and would monitor its use during that period.
Regulators are seeking comment on, among other things, the timing of the record date, the nature of the resale restrictions, and whether other markets such as the TSX should also have the benefit of the exemption.
The comment period for these proposed changes closes on January 20, 2014.
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