Canada: CSA Adopts Amendments To The Prospectus-Exempt Rights Offering Regime

Last Updated: September 30 2015
Article by Rina Jaswal

On September 24, 2015, the Canadian Securities Administrators (the "CSA"), adopted amendments to the prospectus-exempt rights offering regime, resulting in:

  • amendments to:
    • National Instrument 45-106 Prospectus Exemptions ("NI 45-106");
    • National Instrument 41-101 General Prospectus Requirements ("NI 41-101");
    • National Instrument 44-101 Short Form Prospectus Distributions;
    • National Instrument 45-102 Resale of Securities;
  • consequential amendments to:
    • Multilateral Instrument 11-102 Passport System;
    • National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR);
    • Multilateral Instrument 13-102 System Fees for SEDAR and NRD, and
  • the repeal of National Instrument 45-101 Rights Offerings ("NI 45-101")

(collectively, the "Amendments").

In addition, the CSA implemented changes to Companion Policy 45-106CP to NI 45-106 ("45-106C"), and Companion Policy 41-101CP to NI 41-101 ("41-101CP") and  withdrew Companion Policy 45-101CP to NI 45-101 ("45-101CP").  The Ontario Securities Commission and the Autorité des marchés financiers (Québec) will also make a consequential amendment to Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions. The consequential amendment will replace the reference to NI 45-101 with a reference to NI 45-106.  The Amendments and policy changes will come into force on December 8, 2015, provided the receipt of all necessary ministerial approvals.

The current rules requires issuers that want to conduct a prospectus-exempt rights offering in Canada to use the prospectus exemption in section 2.1 of NI 45-106 which requires compliance with NI 45- 101 (the "45-101 Exemption").  The current rules also provides that:

  • the securities regulatory authority must not object to the offering, resulting in a review of the rights offering circular by CSA staff, and
  • reporting issuers are restricted from issuing more than 25% of their securities under the exemption in any 12 month period.

The CSA acknowledged that rights offerings can be one of the fairer ways for issuers to raise capital as they provide existing security holders with an opportunity to protect themselves from dilution.  However, issuers seldom used the 45-101 Exemption to raise capital as the length of time to complete an offering often resulted in lack of certainty of financing and increased costs.  In addition, research conducted by the CSA revealed that the current dilution limit was too low which greatly restricted the ability of issuers with small market capitalization to raise sufficient funds to make a prospectus-exempt rights offering worthwhile.  The Amendments and policy changes are intended to address these concerns by making prospectus-exempt rights offerings more appealing to reporting issuers while maintaining investor protection.

The Amendments create a streamlined prospectus exemption (the "Rights Offering Exemption") that is available only to reporting issuers.  It is not available to investment funds subject to National Instrument 81-102 Investment Funds. The Rights Offering Exemption removes the requirement for regulatory approval prior to use of the rights offering circular. Additional key elements of the Rights Offering Exemption include:

  • Form 45-106F14: the new form of notice that reporting issuers will be required to file and send to security holders informing security holders how to access the rights offering circular electronically;
  • Form 45-106F15: the new form of simplified rights offering circular in a question and answer format with the intention of being easier to prepare and more straightforward for investors to understand, which must be filed but is not required to be sent to security holders;
  • a dilution limit of 100%, instead of the current 25%, and
  • the addition of statutory secondary market civil liability.

The Amendments also create a new prospectus exemption for stand-by guarantors and modify certain conditions of the minimal connection exemption. Furthermore, the Amendments update or revise some of the requirements for rights offerings by way of prospectus and remove the ability of non-reporting issuers to use the Rights Offering Exemption.

Please see the CSA notice for more information.

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.

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Rina Jaswal
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