Two important developments were announced today that affect how Canadian reporting issuers can raise capital from their existing security holders:
- The Ontario Securities Commission (OSC) announced the introduction of a new prospectus exemption for offerings to existing security holders similar to what is offered in other Canadian jurisdictions.
- The Canadian Securities Administrators (CSA) published for comment a proposal to make significant changes to the regime governing rights offerings.
What is a rights offering?
A rights offering is an offering of securities to an issuer's existing security holders entitling them to buy new securities at a specified price. In Canada, this activity requires the issuer to provide a prospectus or establish that it has an exemption from the prospectus requirements.
Why would an issuer carry out a rights offering?
If an issuer is under financial pressure and/or lacks access to other sources of capital, raising capital from existing security holders can provide a lifeline. Because rights offerings are often used in distress scenarios they are sometimes seen as a financing of last resort.
However, a rights offering can also be a fair way to raise capital for issuers that do have other alternatives. Because securities are offered to all security holders on a pro rata basis, it allows the security holders to avoid dilution. Further, if rights are tradable, security holders who do not wish to exercise their rights can still benefit by selling them. Fairness is particularly important if:
- Capital is being raised at a discount to current trading prices and would otherwise dilute existing security holders, and/or
- An existing significant shareholder is willing to provide capital and the board wishes to offer the same opportunity to other security holders.
Many rights offerings include a "backstop" or "stand-by commitment" feature, in which either an existing investor or a new investor agrees to purchase any securities not taken up by existing security holders. Through a backstop mechanism, an investor may be able to acquire securities at a discount level that would not otherwise be permitted by stock exchange rules.
What is the existing regime in Canada for rights offerings?
In Canada, a rights offering can either be carried out under a prospectus or under a rights offering circular. In either case, a review of the offering document by the relevant securities commission(s) has been required. Rights offerings must also be left open for participation by existing shareholders for a period of at least 21 days. Research by the CSA indicates that the average length of time to complete a rights offering is 85 days. This has discouraged some issuers from pursuing rights offerings.
What changes have been made?
A new exemption will be available in Ontario to permit offerings to existing security holders. The new exemption includes investment limits of $15,000 per purchaser, unless suitability advice is obtained, and securities issued will have a four-month hold period.
At the same time, the CSA has proposed a new streamlined process for more traditional rights offerings. An important feature of both the new exemption and the CSA proposal is that offerings can proceed without securities regulatory review, although stock exchange approvals will continue to be required.
PART 1: New existing security holder exemption to come into force in Ontario on February 11, 2015
The OSC announced that a new existing security holder exemption (the Exemption) would be available in Ontario as of February 11, 2015, subject to ministerial approval. Ontario has now joined other Canadian jurisdictions that have already established corresponding exemptions.
Below is a list of the key features of the Exemption:
- The Exemption will be available to reporting issuers with equity securities listed on the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), the Canadian Securities Exchange (CSE) or the Aequitas NEO Exchange (Aequitas) on the effective date of its recognition order (collectively, the Exchanges). The exemption will not be available to investment funds.
- The Exemption only applies to treasury issuances. Under the Exemption, the offering can consist only of the class of equity securities listed on one or more of the Exchanges, or units consisting of the listed security and a warrant to acquire the listed security. The Exemption only covers equity securities.
- The offering cannot result in dilution exceeding 100%.
- The issuer must permit each person who was a security holder (of a security of the same class and series as the listed security to be distributed under the exemption) on the record date to subscribe for securities under the distribution. There is no requirement that securities be allocated on a pro rata basis. However, the OSC takes the position that the issuer and each registrant involved in the offering establish, maintain and apply policies that fairly allocate investment opportunities among all the issuer's security holders.
- The offering is triggered by the issuer disseminating a news release. The news release must disclose: (1) the minimum and maximum number of securities to be distributed, (2) the minimum and maximum aggregate gross proceeds, (3) the use of proceeds, and (4) a description of how the issuer intends to allocate securities.
- The record date must be at least one day prior to the news release. Each purchaser must represent in writing to the issuer that the purchaser held the type of listed security that the purchaser is acquiring under the Exemption as at the record date and that the purchaser continues to hold that security.
- Investment limits apply. A purchaser can only acquire securities of the issuer issued under this Exemption with an acquisition cost of $15,000 in any 12-month period, unless the purchaser receives suitability advice from a registered investment dealer.
- The issuer is not required to provide an offering document. However, any offering materials that are provided must be filed on SEDAR.
- No right of withdrawal or "cooling off" period is provided.
- Securities issued will be subject to a four-month "restricted" hold period (subject to certain other conditions being met).
- Statutory civil liability provisions will apply to securities distributed in connection with an offering under the new exemption.
The exemption is intended to facilitate capital raising for small and medium-sized enterprises. While the exemption is designed for ease of use, investor interest and the amount of capital that can be raised may be constrained by the $15,000 investment limit that applies unless suitability advice is obtained from a registered investment dealer, as well as the required four-month hold period.
PART 2: New proposal for rights offering
What has the CSA proposed?
The CSA has proposed a new streamlined prospectus exemption for rights offerings by reporting issuers (the CSA Proposal). Below is a list of the key features of the CSA Proposal:
- Issuers will notify security holders of the rights offering by sending a short (one or two page) notice to security holders and filing the notice on SEDAR.
- Issuers will still be required to prepare a rights offering circular that will be filed on SEDAR. However, the circular will be shorter and simpler, and will not have to be mailed to security holders.
- The form of circular has been simplified. Most disclosure will be provided in question and answer format. The circular will focus on information about the rights offering, the use of proceeds and the financial condition of the issuer. Disclosure about the issuer's business will not be required. As a result, technical report requirements will not be triggered unless the issuer chooses to include technical disclosure in its circular.
- Securities regulatory authorities will not review the notice or circular.
- A basic subscription privilege must be made available on a pro rata basis to each security holder of the class of securities to be distributed upon exercise of the rights. This is the same as under the existing regime. If security holders are in Quebec, which will almost always be the case, the notice and circular must be translated into French.
- Backstops and stand-by commitments will be permitted.
- Additional subscription privileges, if made available, must be made available to all holders of rights. An additional subscription privilege must also be granted if there is a backstop or stand-by investor. The proposal contains a formula setting out how the additional subscription privilege must apply among rights holders.
- The minimum exercise period will continue to be 21 days.
- The subscription price for securities issuable on the exercise of rights must be lower than the market price at the time of filing the notice. This is consistent with TSX requirements, since the TSX expects rights offerings to be priced at a significant discount (at least 15%) to the market price. The discount is intended to encourage participation by minority security holders.
- In general, securities issued will not be subject to a hold period or resale restrictions. This is consistent with the current regime. Special rules will apply to securities issued to backstopping or stand-by investors. If a stand-by investor is an existing security holder, in general no resale restriction or hold period will apply, although the CSA has indicated that it is considering whether a four-month hold would be appropriate. If a stand-by investor is not an existing security holder or is acquiring the securities for resale, a four-month restricted period will apply.
- Trading of rights will be permitted, consistent with the current regime. This marries up with TSX rules, which require that rights be transferable. The TSX currently automatically lists rights if they entitle holders to acquire securities of a listed class.
- Statutory civil liability provisions will apply to the acquisition of securities in a rights offering.
What limitations are envisioned in the new CSA proposal?
Under the current regime, a rights offering cannot be more than 25% dilutive if it is carried out with a rights offering circular; it is possible to have a more dilutive offering, but a rights offering prospectus must be issued. Under the new proposal, the new streamlined process will be available for offerings that are up to 100% dilutive (measured over the preceding 12 months). A prospectus will still be required for offerings that are more than 100% dilutive.
If the new proposal is approved, how will the CSA monitor compliance?
The CSA proposes to perform post-offering reviews for a period of two years after the new exemption is approved. This may be a concern for issuers who fear that issues will be raised once it is too late to address them, or who do not want to be a test case for compliance with a new regime.
What are the next steps for the new CSA proposal?
The comment period is open until February 20, 2015.
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