Canada: Looking To Raise Capital? Doing A Rights Offering In Canada May Get Easier

On November 27, 2014, the Canadian Securities Administrators (CSA) published for comment proposed amendments to the regulation of rights offerings in Canada, including amendments to the existing prospectus exemption for the distribution of rights to existing security holders (Proposed Exemption). If adopted, the Proposed Exemption would allow reporting issuers—other than investment funds subject to National Instrument 81-102 – Investment Funds—to raise up to 100 per cent of the number of outstanding securities without the use of a prospectus and without prior regulatory review of the rights offering document by the CSA.

The CSA has acknowledged that rights offerings can be "one of the fairer ways for issuers to raise capital" but, to date, these types of offerings have not been viewed as a preferred method of financing in Canada. The Proposed Exemption is designed to expand and streamline the use of rights offerings as a means for reporting issuers to raise capital by reducing both time and cost, while providing existing security holders the opportunity to participate in the offering and avoid any potential dilution.

WHAT IS A RIGHTS OFFERING?

A rights offering is the distribution of rights to purchase securities of an issuer, most commonly common shares. Unlike conventional private placements or prospectus offerings, since the rights are initially distributed to existing security holders, a rights offering offers issuers a method of raising capital without seeking new investors. In Canada, a rights offering must be open for a minimum of 21 days and a maximum of 90 days, during which holders can exercise their rights to subscribe for their pro rata allocation of securities, as well as a share of any securities issuable under rights that are not exercised by other holders. The distribution by the issuer of securities on the exercise of the rights is also exempt from the prospectus requirements in Canada.

The subscription price is typically set at a significant discount to the prevailing market price to entice security holders to exercise their rights. The rights are generally listed on the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSXV), which allows security holders to sell their rights over the exchange. It is also common for one or multiple stand-by purchasers to agree to purchase shares issuable under rights that are not exercised by other holders. This "backstop" would kick in if the issuer is unable to reach a certain amount of subscriptions through its existing security holders.

CURRENT PROSPECTUS EXEMPTION

Currently, the prospectus exemption for rights offerings is available on a limited basis. To rely on the exemption, the rights offering must not, among other restrictions, increase the number of outstanding securities by more than 25 per cent, assuming the exercise of all rights issued under the exemption during the preceding 12 months. There is also a time-consuming regulatory review process, in which the issuer must deliver a draft rights offering circular in prescribed form to the CSA Staff, who must then not object to the offering before the final circular can be delivered to security holders to commence the exercise period. The TSX and TSXV also have restrictions with respect to timing of record date and filings, pricing of the rights, insider participation and a potential shareholder approval requirement.

In its November 27 publication, the CSA states that over the last seven years, the average length of time to complete a rights offering was 85 days and the average time between the filing of the draft rights circular and its acceptance by the securities regulators was 40 days. The current process in Canada is considered more onerous than other jurisdictions such as Australia. Since the underlying securities are often priced at a discount, a lengthy timetable may put pressure on the price of the securities, expose the issuer to market volatility and decrease investor appetite for the offering. Compounded by the statutory limitations of the current exemption, rights offerings have generally been regarded as "financing of last resort" by Canadian market participants, and many issuers have avoided them as a result.

PROPOSED EXEMPTION

Under the Proposed Exemption, a rights offering circular in prescribed form would still be required but would no longer be reviewed by the CSA, and issuers would not be required to deliver the circular to security holders. Instead, the reporting issuer would send to all security holders a short notice setting out certain prescribed disclosure about the rights offering and how to electronically access the circular. The circular would be in a user-friendly, question-and-answer format and focus on information about the rights offering, use of proceeds and the financial condition of the issuer, without the inclusion of information regarding the issuer's business. This is good news for resource-based issuers, as they would not be required to disclose in the circular technical information concerning material mineral projects, which would otherwise trigger the requirement to file updated technical reports under National Instrument 43-101 – Standards of Disclosure for Mineral Projects.

Most importantly, the Proposed Exemption would increase the dilution limit from 25 per cent to 100 per cent. As a result, under the Proposed Exemption, reporting issuers wanting to issue common shares could raise up to their market capitalization without a prospectus and without CSA review, with the added condition that the rights must be issued on a pro rata basis to each security holder of the underlying securities. The exercise price must be at a discount to the market price at the time of filing the notice for issuers whose shares are listed on a stock exchange, or at a discount to the fair value if the issuer's shares are not listed.

In streamlining the disclosure and review requirements, the CSA assumes most investors exercising rights are existing holders who are already familiar with the issuer's continuous disclosure. To balance the reduced investor protection resulting from the removal of regulatory review, the CSA has proposed extending statutory civil liability for secondary market disclosure to the acquisition of securities in a rights offering. Similar to a prospectus, reporting issuers would be required to certify that the circular contains no misrepresentation and investors would have a right of action in respect of a misrepresentation in the circular and any of the issuer's continuous disclosure.

Certain requirements under the current exemption would continue in effect under the Proposed Exemption. Notably, the exercise period remains a minimum of 21 days to a maximum of 90 days. Stand-by commitments would still be permitted so long as the issuer confirms and discloses the financial ability of the stand-by guarantor to fulfil the commitment. Resale of the underlying securities would still be subject to a seasoning period, but in most cases no hold restrictions would apply for reporting issuers with more than four months of reporting history. However, the CSA indicated that they may impose a restricted period for securities acquired by stand-by guarantors who are not existing security holders.

The de minimis prospectus exemption would also continue to be available where the number of securities and beneficial holders in Canada and the local jurisdiction are less than 10 per cent of all of the securities or holders. This is useful for foreign companies with a limited number of security holders in Canada who may be interested in extending a rights offering conducted in a foreign jurisdiction to their Canadian investors.

IMPLICATIONS

The Proposed Exemption is a step towards transforming rights offerings into a more popular and viable alternative for reporting issuers to raise capital in Canada. By streamlining the regulatory review process and permitting larger offerings to be prospectus exempt, issuers may now be more inclined to consider raising capital through rights offerings.

DEADLINE FOR COMMENTS

The deadline for submitting comments to the CSA on the Proposed Exemption is February 25, 2015. The CSA proposal includes 13 specific questions regarding the amendments, which commenters are invited to address in their responses. Issuers, investors and other market participants may wish to avail themselves of this opportunity to provide comments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions