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 "New Exemption").
- The Canadian Securities Administrators ("CSA") published for comment a proposal to make significant changes to the regime governing rights offerings (the "Proposed Changes").
What is a rights offering?
A rights offering is an offering of securities to an issuer's existing security holders 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.
What is the existing regime in Canada for rights offerings?
In Canada, 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?
The New Exemption will be available in Ontario to permit offerings to existing security holders. It 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.
How will this affect the mining sector?
According to the TMX Group, there are more mining companies listed on the TSX and the TSX-V than on the exchange(s) of any other jurisdiction in the world. In the current investing climate, reporting issuers in the mining sector must deal with higher-than-normal volatility in commodity prices which can often be accompanied by large movements in share prices. This creates a need for speed and efficiency in fundraising when financing is required. The current rights offering rules require a review by securities regulators and this can be a lengthy process, acting as a deterrent to reporting issuers wishing to utilize rights offerings as a means of raising capital.
In a recent example, Paladin Energy Ltd. ("Paladin", a uranium miner cross-listed in Canada and Australia) announced a $138 million rights offering on November 25, 2014. However, given the regulatory requirements in Canada, Paladin's management decided to exclude its Canadian shareholders. Australian rules allow Paladin to announce and complete the rights offering on an extremely tight timetable, protecting the company from market volatility and reducing risk. A Paladin spokesman said, "The advantage to the issuer in being able to quickly complete an offering of this sort is significant". In this case, the reporting issuer loses because it is leaving potential investor money "on the table", while shareholders in Canada could be faced with dilution of more than 70%.
The New Exemption, along with the Proposed Changes, create a streamlined process that decreases the time, effort, and expense required to issue a rights offering, making it a more attractive financing option for reporting issuers in the mining sector. To learn about the specific contents of the New Exemption and the Proposed Changes please see our Dentons Insight: Important changes to offerings to existing security holders and rights offerings in Canada published on November 28th.
For more information, visit our Securities Mining Law blog at www.securitiesmininglaw.com
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