The Canadian Securities Administrators (CSA) have announced that a revised rights offering regime for reporting issuers will come into force on December 8, 2015 (the New Rules). The New Rules will benefit reporting issuers seeking to raise capital from existing securityholders by:
- shortening the timeframe for completion of a rights offering;
- simplifying securities regulatory filings through a new reader-friendly Q&A format;
- eliminating the need for regulatory approvals;
- permitting the issuance of up to 100 percent of the outstanding number of securities (or principal amount, in the case of debt securities) in a 12-month period; and
- reducing legal, printing and distribution costs of securities regulatory filings.
Rights offerings are a financing structure where existing securityholders are given a preferential right to purchase additional securities of an issuer in order to maintain their pro rata ownership of such issuer.
Reporting issuers and market participants frequently point to the cost and lengthy regulatory review process as barriers to undertaking rights offerings in Canada. In responding to these concerns, the CSA proposed amendments to the rights offering regime and circulated a Notice and Request for Comment on November 27, 2014. The New Rules were finalized on September 24, 2015, and are scheduled to come into force on December 8, 2015.
Rights Offerings under the New Rules
The New Rules will be incorporated into the existing prospectus exemption rules under National Instrument 45-106 – Prospectus Exemptions of the Canadian Securities Administrators (NI 45-106). Reporting issuers (other than investment funds) who have filed all applicable periodic and timely disclosure documents are eligible to rely on the New Rules in completing a rights offering.
The streamlined process for rights offerings under the New Rules is set out below:
|Notice and Disclosure:||An offering notice is prepared in accordance with Form 14 of NI
45-106 (an Offering Notice). The Offering Notice is presented in a
Q&A format and requires answers to nine prescribed
An offering circular is concurrently prepared in accordance with Form 15 of NI 45-106 (an Offering Circular). The Offering Circular is presented in a Q&A format and requires answers to 34 prescribed questions, including the use of proceeds, procedural matters for exercising rights, and interests of underwriters and insiders.
In accordance with the TSX Company Manual, TSX-listed issuers are to consult with the exchange and provide drafts of the Offering Circular to the exchange. The offering must receive final acceptance from the TSX at least seven trading days prior to commencing a rights offering. We anticipate this review period may be shortened or eliminated to accommodate the intent of the New Rules.
||The offering is commenced when the Offering Notice is
electronically filed on SEDAR and sent to all existing
Canadian-resident holders of the class of securities being offered.
At the same time, the Offering Circular is electronically filed on
SEDAR and made available, but is not required to be physically
delivered, to intermediaries and securityholders.
|Exercise Period:||Securityholders must be provided with not less than 21 and not
more than 90 days to exercise their rights under the offering (and,
if applicable, elect to participate in additional subscription
privileges, as described below).
|Closing:||The issuer must file a closing news release. The closing news
release is to contain prescribed information relating to the
offering, including the gross proceeds, the number of securities
distributed and confirmation that the securities distributed were
issued under the basic subscription privilege, the additional
subscription privilege and/or a stand-by commitment.
Permitted Offering Terms
Rights offerings under the New Rules must comply with the following terms:
|Exercise Period:||The rights offering may not close less than 21 and not more
than 90 days from the day the Offering Notice is first sent to
|Pricing:||The subscription price for securities issued under the New
Rules must be less than the market price (as defined in the New
Rules) at the time of filing the Offering Notice. For reporting
issuers not listed on a marketplace, the subscription price must be
less than the fair value of the securities at the time of filing
the Offering Notice.
|Dilution Limit:||The total number of securities issuable under the rights
offering (together with all other rights offerings during the
12-month period immediately preceding the offering) must not exceed
100 percent of the outstanding securities of the issuer (or
principal amount, in the case of debt securities).
|Additional Subscription Privileges
||The offering may give securityholders the right to subscribe
for securities not taken-up by other securityholders under the
basic subscription privileges, but is limited to each
securityholder's pro rata participation in the basic
||The issuer may arrange for a stand-by commitment, by a
guarantor with sufficient financial resources, to acquire the
securities not otherwise subscribed for by existing
securityholders, provided it first grants additional subscription
privileges to its existing securityholders.
|Exchange Requirements (if applicable):||The rules and regulations of the TSX Company Manual and TSX
Venture Exchange impose additional requirements for rights
offerings. For example, the TSX Company Manual requires that a
rights offering be accepted for filing by the TSX before it is
commenced. We anticipate that the TSX and TSX-V will modify their
rights offering regimes to accommodate the intent of the New
Secondary Market Liability and Investor Protection Changes
Under the New Rules, investors will be given a statutory right of action for damages resulting from any misrepresentation in an issuer's continuous disclosure record (including misrepresentation in an Offering Circular).
The New Rules remove the ability of non-reporting issuers to complete a prospectus-exempt rights offering.
In addition, the New Rules allow a foreign issuer to complete a rights offering in Canada if, to its knowledge, all securityholders resident anywhere in Canada constitute 10 percent or less of all holders of the applicable class of securities.
The TSX and TSX-V have not yet announced changes to their respective rights offering regimes in light of the New Rules; however, we will continue to monitor developments and will provide updates as appropriate. Bennett Jones would be pleased to work with your business in determining how best to leverage the New Rules and facilitate a successful rights offering to your existing securityholders.
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.