Canada: Canadian Securities Administrators Adopt New Prospectus Exemption For Distributions To Existing Security Holders

Last Updated: March 20 2014
Article by Trevor S. Korsrud and Danielle Mayhew

On March 13, 2014, the securities regulatory authorities in all Canadian jurisdictions, with the exception of Ontario and Newfoundland and Labrador (the "Participating Jurisdictions"), published Multilateral CSA Notice 45-313 (the "Notice") setting out a new prospectus exemption that, with certain stipulations, allows issuers listed on the Toronto Stock Exchange ("TSX"), TSX Venture Exchange ("TSX-V") and the Canadian Securities Exchange ("CSE") to raise funds through distributions of securities to their existing security holders (the "Exemption").

Background

On November 21, 2013 the securities regulatory authorities in the Participating Jurisdictions published for comment a proposed prospectus exemption (the "Proposal") for distributions to existing holders of TSX-V issuers. A summary of the Proposal can be found here. The regulatory authorities received submissions from 241 commentators, the majority of which were supportive of the Proposal. There are several key amendments to the Exemption, as adopted, which were not included in the Proposal and which are set forth below under the heading "Changes from the Proposal".

The Exemption

The Exemption allows issuers who have a class of equity securities listed on the TSX, TSX-V or CSE to issue these securities to their existing security holders, subject to a number of conditions. The key conditions of the Exemption are:

  • The issuer must have a class of equity securities listed on the TSX-V, TSX or CSE.
  • The offering can consist only of a class of equity securities listed on the TSX-V, TSX, or CSE, or units consisting of the listed security and a warrant to acquire the listed security.
  • The issuer must make the offering available to all existing security holders that hold the same type of listed security.
  • Unless the investor has obtained suitability advice from a registered investment dealer, the investor can only invest a maximum of $15,000 per issuer under the Exemption in a 12 month period.
  • The issuer must have filed all timely and periodic disclosure documents as required under applicable securities laws.
  • The issuer must issue a news release disclosing the proposed offering, the maximum and minimum amounts of the offering, and details of the use of proceeds.
  • Each investor must confirm in writing to the issuer that, as at the record date, they held the type of listed security offered under the exemption.
  • An investor must be provided with certain rights of action in the event of a misrepresentation in the issuer's continuous disclosure record.
  • Although an offering document is not required, if an issuer voluntarily provides one, the issuer must file the offering document with the securities regulatory authority and an investor will have certain rights of action in the event of a misrepresentation in it.

The first trade of securities issued under the Exemption will be subject to resale restrictions under section 2.5 of National Instrument 45-102 - Resale of Securities, which includes a 4 month restricted period from the date of the distribution. Issuers are also required to file a report of exempt distribution within 10 days after each distribution under the Exemption.

Changes from the Proposal

There are a number of changes to the Exemption as adopted from the initial Proposal. The key amendments or additions are:

  • Under the Proposal the exemption was only to be available for issuers listed on the TSX-V. Citing broad support for the Proposal, securities administrators extended the Exemption to issuers listed on the TSX and CSE.
  • The Exemption includes a requirement not present in the Proposal, whereby the issuer must make the offer available to all holders who, as of the record date, hold a listed security of the same class and series as the offering. Accordingly, issuers are not able to make the offering to selected security holders. However, the issuer is only required to make the offer to those security holders who reside in jurisdictions where the Exemption or similar exemption is available.
  • The Proposal did not specify a record date on which a security holder must already be a holder of securities of the issuer in order to be eligible to participate on in the offering, but asked commentators whether it should be one day before the announcement of the offering, or a longer period. It was decided that the record date under the Exemption must be at least one day prior to the issuance of the press release announcing the offering.
  • The press release to be issued regarding the offering must include, among other things, a description as to how the issuer intends to allocate oversubscriptions.

Implementation

The implementation of the Exemption is effective concurrently with, or as soon as possible after, the issuance of the Notice on March 13, 2014. Some of the Participating Jurisdictions had considered a sunset clause in the Notice which has not, however, been provided for in the Exemption as adopted, meaning it does not expire.

Of further note is the intention of the Ontario Securities Commission to publish for comment new capital raising prospectus exemptions, including one for distributions to existing security holders who are resident in Ontario. It is expected that such exemption, if adopted, would be similar to the Exemption that is now available in the Participating Jurisdictions. The Ontario exemptions are expected to be published on or about March 20, 2014

The full text of the Notice, including the full form of exemption in the local jurisdictions, can be found here.

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Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.

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