Canada: CSA Proposes Streamlining Of Rules For At-The-Market Offerings

On May 9, 2019, the Canadian Securities Administrators ("CSA") published proposed amendments (the "Proposed Amendments") for a 90-day comment period (ending on August 7, 2019) to National Instrument 44-102 - Shelf Distributions ("NI 44-102") that would, among other things, eliminate the requirement to obtain exemptive relief from certain regulatory requirements necessary for issuers who wish to conduct at-the-market ("ATM") offerings in Canada.  ATM offerings allow issuers to sell their securities into the market on a stock exchange with greater flexibility and speed than more traditional methods, providing more timely access to public capital. The CSA noted in its Notice and Request for Comment regarding the Proposed Amendments that the current restrictions and obligations imposed on issuers wishing to conduct ATM offerings may be the reason why ATM offerings are not as prevalent in Canada as they are in the United States.1 The Proposed Amendments attempt to alleviate these regulatory burdens, which could reduce the cost and time to complete ATM offerings in Canada and potentially make them more attractive to issuers.

Highlights of the Proposed Amendments

The Proposed Amendments (discussed in more detail below under "Summary of the Proposed Amendments") aim to make ATM offerings more accessible to Canadian issuers by:

  1. removing the requirement to obtain the regulatory exemptive relief necessary to complete an ATM offering by codifying the relief currently required by issuers and dealers wishing to conduct ATM offerings;
  2. removing the 10% Aggregate Cap (as defined below) on the number of securities issuable under a single ATM distribution prospectus supplement; and
  3. permitting non-redeemable investment funds ("NRIFs") and exchange-traded mutual funds ("ETFs") that are not in continuous distribution to undertake ATM offerings.

Background on ATM Offerings

Under the current rules for ATM offerings and under the Proposed Amendments, in order to conduct an ATM offering an issuer must qualify a base shelf prospectus and file a prospectus supplement in accordance with NI 44-102. Prior to or concurrently with the prospectus supplement, the issuer would typically enter into a distribution agreement with one or more dealers, which provides for, among other things, customary dealer protections (including issuer representations and warranties, auditor comfort letters, etc.), commission to be paid and whether the dealer is acting on an agency or underwritten basis. 

Under the existing statutory regime, in order to complete an ATM offering exemptive relief is needed because certain regulatory requirements, namely the requirement to deliver a prospectus to purchasers, a purchaser's right of rescission and certain other disclosure requirements are impracticable or not applicable in ATM distributions.

While issuers are generally granted exemptive relief in the ordinary course under the current ATM rules, applying for such relief adds additional costs and time to complete these transactions. In addition, when granted, the exemptive relief orders have typically (i) imposed a cap on the number of securities that can be sold under an ATM offering to 25% of the total trading volume of the issuer's securities on any given day and (ii) required the issuer to publicly report the number and average price of the securities distributed on a monthly basis, and the total gross proceeds, commissions and net proceeds, within seven calendar days after the end of the month.

An additional limitation in the existing rules for ATM offerings is that NI 44-102 also currently limits the market value of securities issuable in a single ATM distribution prospectus supplement to 10% of the aggregate market value of the offered class of securities2 as at the last trading day of the month before the month in which the first trade under the ATM distribution is made (the "10% Aggregate Cap").

Summary of the Proposed Amendments

The Proposed Amendments seek to replace the entirety of Section 9 of NI 44-102. The material changes are as follows:

1. Imposition of a Liquidity Threshold?

The CSA is contemplating whether or not to impose a liquidity threshold requirement on ATM offerings. Once the CSA has reviewed the comments received on the Proposed Amendments with respect to the two options detailed below, it will decide which option to include in the final amendments to NI 44-102. 

Option 1: An imposed liquidity threshold intended to protect market integrity and that will require that: (i) the distributed security in the ATM offering is a highly-liquid security (as defined below); or (ii) the aggregate number of securities of the class distributed in the ATM offering on any trading day does not exceed 25% of the trading volume of that class on all marketplaces (as defined in National Instrument 21-101 – Marketplace Operation) on that day.

            or

Option 2: In the alternative, instead of the prescribed restrictions in Option 1 above, this option would rely on existing market and regulatory factors, including: (i) issuers already being incentivized not to conduct ATM offerings that would materially affect the market price of their securities, and (ii) the requirement to engage an investment dealer to facilitate an ATM offering onto the marketplace, and such investment dealer: (A) having the experience and expertise in managing orders to limit negative impacts on market integrity and (B) being prohibited from engaging in conduct that may disrupt a fair and orderly market. 

The Proposed Amendments define "highly-liquid security", in relation to an ATM distribution, as a listed security or quoted security that: (a) has traded, in total, on one or more marketplaces, as reported on a consolidated market display during a 60-day period ending not earlier than 10 days prior to the distribution: (i) an average of at least 100 times per trading day, and (ii) with an average trading value of at least $1,000,000 per trading day; or (b) at the time of the distribution is subject to Regulation M under the United States Securities Exchange Act of 1934 and is considered to be an "actively-traded security" under that regulation3.

2. Removal of the 10% Aggregate Cap.

3. Codifying exemptive relief currently required by issuers and dealers wishing to conduct ATM offerings, including exemptions:

     (a) for the underwriter from the requirement to deliver a prospectus to purchasers in a distribution of securities; and

     (b) for the issuer and underwriter from certain of the prospectus form requirements, including a relaxation of the form of statement of rights.

4. Permit ATM offerings for NRIFs and ETFs that are not in continuous distribution.

The Proposed Amendments would not otherwise modify the operational or regulatory requirements applicable to NRIFs or ETFs and such issuers will still be subject to existing requirements in National Instrument 81-102 – Investment Funds and otherwise, such as prohibiting the issuance of new securities at a price less than the fund's net asset value per security.

If you have any questions regarding ATM offerings, the Proposed Amendments or wish to submit a comment letter to the CSA, we invite you to contact any of the authors or any other member of our Capital Markets team.

Footnotes

1 The Ontario Securities Commission (the "OSC") published a Local Comment Annex to the CSA's Notice and Request for Comment regarding the Proposed Amendments, which noted, among other things, that since 2010, 24 Canadian issuers have conducted 30 ATM distributions raising a total of $2.76 billion.  By contrast, since 2010, 885 issuers in the U.S. have raised $245 billion in approximately 1,435 ATM distributions.  In addition, the OSC also noted, that since 2010, 73% (or 22 of 30) of the ATM offerings initiated by Canadian or cross-listed issuers were exclusively conducted in the United States.  

2 Securities held by securityholders who hold 10% or more of the securities of the offered class are also typically excluded in calculating the number of securities outstanding.

3 The proposed definition of highly-liquid security mirrors the definition set forth in the Universal Market Integrity Rules issued by the Investment Industry Regulatory Organization of Canada ("IIROC").  IIROC also publishes on its website daily a current list of "highly-liquid securities", which list contained 505 securities on July 8, 2019.  The list can be accessed at https://www.iiroc.ca/industry/rulebook/Pages/Highly-Liquid-Stocks.aspx.

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