The rights offering exemption has historically been an underutilized means of raising capital for public issuers. This exemption from the requirement to file a prospectus allows issuers a method of financing whereby existing security holders of the issuer are given the opportunity to acquire additional securities at a discount from the market price, while security holders who do not exercise their rights are generally compensated for the resulting dilution through their ability to sell their rights.
Issuers' reluctance to utilize this exemption is commonly attributed to: (a) a regulatory limit on the amount of financing that can be carried out under the exemption; and (b) the lengthy period of time required to obtain regulatory and exchange approval. The Canadian Securities Administrators (CSA) indicated in a November 27, 2014 notice that the average length of time to complete a rights offering was 85 days. Furthermore, previous rules stated that an issuer could not increase the number of its outstanding securities by more than 25 percent by means of a rights offering without a prospectus.
Effective December 8, 2015, the CSA has adopted amendments to the rules surrounding rights offerings to make the rights offering exemption more attractive. Among other things, the amendments:
- Reduce the amount of disclosure required to be included in a rights offering circular (the Circular) (see Form 45-106F15);
- No longer require that the Circular be vetted by the securities regulatory authorities or sent to the security holders (the Circular must still be filed on SEDAR along with a short notice – Form 45-106F14 (the Notice) which must be sent to the security holders); and
- Permit an increase in the number of outstanding securities of up to 100 percent under the rights offering exemption over a 12-month period.1
On January 18, 2016, each of the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) announced policy changes to further create an attractive platform for issuers to carry out rights offerings while still protecting investors.
Prior to the changes, the final Circular must have received TSX pre-clearance at least seven trading days prior to the record date.2 This has now been amended to five trading days. The TSX notice announcing the change also stated that drafts of the Notice and Circular or prospectus should be submitted to the TSX at least five trading days prior to finalization.
The TSXV has similarly reduced the minimum time period between its pre-clearance of the rights offering documents and the record date from seven to five business days. The TSXV also intends to amend Policy 4.5 – Rights Offerings in its Corporate Finance Manual to provide that:
- The subscription price for securities to be acquired on the exercise of rights must be at least $0.01. The previous minimum of $0.05, which is above the trading price of many securities trading on the TSXV, made a rights offering impractical for the issuers of those securities;
- The minimum exercise price of a warrant forming part of a unit to be acquired on the exercise of a right must not be less than the greater of: (i) the market price of the securities prior to the press release announcing the rights offering; and (ii) $0.05. The previous requirement was that the exercise price could not be less than the rights offering subscription price;
- At the election of the issuer the rights being issued may, but are not required to, be listed for trading on the TSXV (although they will still have to be transferable); and
- Shareholder approval of the creation of a new control person (which is generally a holder of more than 20 percent of the outstanding voting securities of the issuer) as a consequence of a stand-by commitment will not be required if: (i) the rights are listed for trading on the TSXV; and (ii) the rights exercise price is at a "significant discount" to the market price.3
Pending the changes to the TSXV Corporate Finance Manual, the TSXV has indicated that it will grant waivers, on application, to enable issuers to take advantage of (a) and (d). An application, or intended application, for a waiver of the listing requirement must be disclosed in the press release announcing the rights offering.
The coming months may provide an insightful indication of whether issuers will respond to the amendments made by the CSA, TSX and TSXV. However, it is clear that the various regulatory bodies are making concerted efforts to encourage issuers to take advantage of the rights offering exemption as it may prove to be one of the more cost effective and efficient means for publicly listed issuers to raise capital.
1 For a thorough explanation of the CSA amendments, please see " New rules for rights offerings could be a game changer" prepared by Alan J. Hutchinson and Daniel McElroy.
2 The record date being the date of the closing of the issuer's transfer books to allow for the preparation of the final list of participating security holders entitled to receive rights.
3 "Significant discount" means at least the maximum discount to the market price allowed by the TSXV for private placements. See the definition of "Discounted Market Price" in Policy 1.1 – Interpretation in the TSXV Corporate Finance Manual.
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