A little over a year ago, certain of the Canadian Securities Administrators (the "CSA") adopted a new exemption (Ontario adopted a revised version a few months later) which allowed listed issuers to issue listed securities to their existing securityholders. Recently, the CSA adopted amendments to the prospectus-exempt rights offering regime. On their face, these two exemptions appear very similar. This article reviews the two exemptions and then assesses the principal differences.
Existing Securityholder Exemption
The key conditions of the existing securityholder exemption (the "Existing Securityholder Exemption") include:
- the issuer must have a class of equity securities listed on the TSX Venture Exchange (the "TSXV"), Toronto Stock Exchange (the "TSX") or Canadian Securities Exchange (the "CSE");
- the offering can consist only of a class of equity securities listed on the TSXV, TSX, or CSE, or units consisting of the listed security and a warrant to acquire the listed security;
- the issuer must make the offering available to all existing security holders that hold the same type of listed security;
- unless the investor has obtained suitability advice from a registered investment dealer, the investor can only invest a maximum of $15,000 per issuer under the exemption in a 12-month period;
- the issuer must have filed all timely and periodic disclosure documents as required under applicable securities laws;
- the issuer must issue a news release disclosing the proposed offering, including details of the use of proceeds;
- each investor must confirm in writing to the issuer that, as at the record date, they held the type of listed security offered under the exemption;
- an investor must be provided with certain rights of action in the event of a misrepresentation in the issuer's continuous disclosure record; and
- although an offering document is not required, if an issuer voluntarily provides one, the issuer must file the offering document with the securities regulatory authority and an investor will have certain rights of action in the event of a misrepresentation in it.
The first trade of securities issued under the Existing Securityholder Exemption are subject to resale restrictions under section 2.5 of National Instrument 45-102 Resale of Securities, like most other capital-raising prospectus exemptions. In addition, issuers will have to file a report of exempt distribution within 10 days after each distribution under the exemption.
Rights Offering Exemption
The key conditions of the amended rights offering exemption (the "Rights Offering Exemption") include:
- it is available only to reporting issuers, but not to investment funds;
- the removal of the requirement for a regulatory review prior to use of the rights offering circular;
- a new form of notice (Form 45-106F14 or the Rights Offering Notice) that reporting issuers will have to file and send to security holders informing security holders how to access the rights offering circular electronically;
- a new form of simplified rights offering circular (Form 45-106F15 or the Rights Offering Circular) in a question and answer format that is intended to be easier to prepare and more straightforward for investors to understand – it will have to be filed but not sent to security holders;
- a dilution limit of 100%, instead of 25% as under the old rights offering exemption; and
- the addition of statutory secondary market civil liability.
The amendments create a new prospectus exemption for stand-by guarantors and modify certain conditions of the minimal connection exemption. The amendments also update or revise some of the requirements for rights offerings by way of prospectus.
In addition, the amendments remove the ability of non-reporting issuers to use the Rights Offering Exemption.
There are three principal differences between the two exemptions:
- there is no resale restriction applicable to the rights or underlying securities issued under the Rights Offering Exemption whereas securities issued under the Existing Securityholder Exemption are subject to a four-month hold period;
- there is no specific time period that an offering in reliance on the Existing Securityholder Exemption must remain open other than a reasonable timeframe to ensure the offering fairly allocates the investment opportunities among the issuer's securityholders. The Rights Offering Exemption requires that the offering remain open for a minimum of 21 days; and
- the related party rules under Multilateral Instrument 61-101 – Protection of Minority Shareholders in Special Transactions applies to offerings under the Existing Securityholder Exemption but not to offerings under the Rights Offering Exemption. As a result, issuers relying on the Existing Securityholder Exemption will need to ensure that related parties are treated identically to other securityholders to avoid the application of the valuation and minority approval requirements on MI 61-101.
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.