Effective March 13, 2014, the securities regulators in each jurisdiction of Canada (other than Ontario and Newfoundland) (the "Participating Regulators") enacted a new capital raising prospectus exemption (the "Exemption") for issuers listed on the Toronto Stock Exchange (the "TSX"), TSX Venture Exchange (the "TSXV") and the Canadian Stock Exchange (together with the TSX and the TSXV, the "Exchanges"). This exemption had initially been proposed in November 2013 and had received overwhelming support in commentary from the capital markets community. However, the Participating Regulators have made some significant changes from the proposed exemption as a result of the comments they received.
The core concept of the new exemption is that an investor who holds an issuer's security that is listed on one of the Exchanges (the "Listed Security"), however acquired, may subscribe for additional amounts of that same type of security or units (with each unit comprised of the Listed Security and a warrant to acquire the Listed Security) without the need for the issuer to prepare a prospectus or other offering document.
The Exemption marks an additional attempt by securities regulatory authorities to open up the financing avenues available to issuers, in particular smaller issuers, while still aiming to provide a sufficient degree of protection for ordinary investors.
Conditions for Use of the Exemption
The Exemption is subject to a number of conditions before being available for use:
- The issuer must be a reporting issuer in at least one jurisdiction of Canada;
- The issuer must have a class of equity securities listed on one of the Exchanges;
- The issuer must have filed all timely and periodic disclosure requirements as required under applicable securities laws;
- The offering can only consist of the Listed Securities or units comprised of Listed Securities and warrants to acquire Listed Securities;
- The issuer must issue a news release disclosing the proposed offering, including the fact that the Exemption is intended to be relied on, details of the use of proceeds, the number and pricing of the securities to be issued (including minimum and maximum amounts, if applicable), and how the issuer intends to deal with any oversubscriptions;
- The issuer must offer the distribution to all holders of the Listed Security to be issued as of a record date of at least one day prior to the announcement of the offering;
- The investor must purchase the applicable securities as principal and must confirm in writing that as of the record date the investor held the Listed Security;
- If the investor has not received advice as to the suitability of the investment from a registered dealer, the investor must not invest more than $15,000 in the aggregate in securities of the issuer using the Exemption in the past 12 months;
- The issuer must provide the investor with rights of action in the event of a misrepresentation in the issuer's continuous disclosure record;
- If the issuer voluntarily provides an offering document in connection with the offering, the issuer must provide the investor with rights of action in the event of a misrepresentation in the offering document;
- The subscription agreement for the offering must contain a certificate of the issuer that declares that the issuer's continuous disclosure does not contain a misrepresentation, and must certify that there are no material changes or material facts related to the issuer that have not been generally disclosed; and
- If any offering material, other than a subscription agreement, is provided to an investor in connection with a distribution using the Exemption, that offering material must be filed with the securities regulatory authority no later than the day it was first provided to the investor.
Any securities issued pursuant to the Exemption would be subject to a 4-month hold period, and the issuer would be required to file a report of exempt distribution within 10 days of completion of the offering.
Summary of Changes from the Proposed Exemption
The Participating Regulators enacted several substantial changes to the Exemption from what was initially proposed, which are summarized below.
Expansion of Offering
The Exemption now requires that an issuer make the offer to all holders of the Listed Securities which it proposes to distribute, whereas there was no such requirement in the initial proposed exemption. This effectively makes the Exemption akin to a rights offering. The Exemption does not specify how this offer is to be made, and it is assumed that the offering news release is intended to act as this general offer. This practically means that an issuer must allow sufficient time between announcement and closing for the holders of the Listed Security to receive and review the press release, contact the issuer to demonstrate their interest, and to receive and complete the relevant subscription documentation. Accordingly, the Exemption cannot reasonably be used in order to raise funds in short order.
Of note, this requirement only applies to holders of Listed Securities who are resident in the jurisdictions governed by the Participating Regulators, or in other jurisdictions where similar rules are adopted.
Expansion of Issuers
The initial proposal only contemplated that issuers listed on the TSXV would be able to avail themselves of the Exemption, whereas the Exemption in fact permits issuers listed on any of the Exchanges to raise funds. Since there was no justifiable basis for discriminating between issuers listed on different stock exchanges, we fully support this change.
Setting of Record Date
While not a change, the initial proposed exemption did not establish the record date to use for the offering. The Participating Jurisdictions had made two suggestions for comment, the first between a record day of at least one day before the offering, and the second being a more substantial time frame (such as two months). The majority of the commentary received from the capital markets was that a shorter required record date would be the most applicable, because an extended record date does not necessarily mean that an investor will have greater familiarity with an issuer, and in either case they will have made an initial investment decision to purchase securities of the issuer, which investment decision forms the basis for the granting of the Exemption in the first place.
No Sunset Clause
The exemption has been adopted as a rule in Alberta and Quebec and as a blanket order by all the other Participating Regulators. The Participating Regulators who adopted the Exemption with a blanket order had proposed to have a sunset clause where the Exemption would expire on December 31, 2015 unless re-adopted or enacted as a rule. They intended to do so in order to be able to review the use of the Exemption. The Exemption no longer contains this sunset clause and has no set termination date set by any of the Participating Regulators.
The Participating Regulators have noted that the Ontario Securities Commission is anticipated to publish for comment four new capital raising prospectus exemptions on or about March 20, 2014, which are expected to include a prospectus exemption for distributions to existing securityholders. It is not clear at this time the degree to which any exemption proposed by the Ontario Securities Commission will align with the Exemption. We expect that any lack of harmonization between the Ontario proposal and the Exemption will be raised during the comment period and potentially addressed before the Ontario proposal is adopted in final form.
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