Canada: Freely Trading Securities Without A Prospectus: CSA Adopts New Exemption Allowing For An Efficient Means Of Raising Equity Capital For Canadian Public Companies

On September 8, 2022, the Canadian Securities Administrators ("CSA") announced amendments to National Instrument 45-106 Prospectus Exemptions ("NI 45-106"), introducing a new prospectus exemption called the Listed Issuer Financing Exemption (the "Exemption") available to eligible listed public companies. The Exemption is aimed at streamlining the process by which smaller Canadian public companies can raise capital through the issuance of freely tradeable securities, as well as facilitating retail investor participation in securities offerings while maintaining appropriate investor protections.

Although eligible public companies can generally rely on the current short-form prospectus regime in order to issue freely tradeable securities under Canadian securities laws, for many smaller Canadian public companies, raising relatively small amounts of capital in this manner can still be quite prohibitive from a cost and timing perspective. The Exemption is intended to serve as an alternative to the commonly used short-form prospectus regime.

Who Can Qualify?

In order to distribute securities under the Exemption, an issuer must:

• have a class of equity securities listed for trading on a recognized Canadian stock exchange;
• have been a reporting issuer for at least 12 months in at least one jurisdiction in Canada immediately prior to announcing the offering of securities in reliance on the Exemption;
• have filed all timely and periodic disclosure documents as required under continuous disclosure requirements in Canadian securities legislation;
• not be an investment fund;
• have active business operations (an issuer whose operations have ceased or whose principal asset is cash, cash equivalents or its exchange listing will not qualify, including special purpose acquisition companies and capital pool companies);
• at the time of distribution, reasonably expect to have available funds to meet their business objectives and liquidity requirements for a period of 12 months following the distribution;
• prepare and file a short offering document containing the information specified in Form 45-106F19 Listed Issuer Financing Document (the "Offering Document") and announce the offering by way of a news release, disclosing, among other matters, the details of the offering of securities, a summary description of the business of the issuer and recent developments before soliciting an offer to purchase. The release must state that the Offering Document is accessible on SEDAR and on the issuer's website; and
• cease the distribution of securities no later than the 45^th day after issuing the news release.

In meeting the filing of all timely and periodic disclosure documents condition, the issuer is not required to have a current annual information form.

The Exemption is not available if an issuer intends to use the funds raised to complete a "significant acquisition" as defined in National Instrument 51-102 Continuous Disclosure Obligations, a restructuring transaction or any other transaction that requires security holder approval. If an issuer is intending to raise capital to finance a significant acquisition or a restructuring transaction by distributing securities to retail investors, the issuer would be required to use the prospectus regime or rely on a different prospectus exemption.

The Exemption

The Exemption allows an eligible issuer to raise up to the greater of $5 million or 10 per cent of the issuer's market capitalization, up to a maximum of $10 million, in the 12-month period immediately before announcing the offering (the "Period"). An issuer will, however, be restricted from distributing securities under the Exemption which would, when combined with all other distributions made by the issuer under the Exemption during the Period, result in an increase of more than 50 per cent of the issuer's outstanding listed equity securities, as of the date that is 12 months before the date of the announcement of the offering.

Notably, the securities can be issued to any type of investor and are freely tradeable on issuance, similar to securities issued under a short-form prospectus, provided only listed equity securities or securities convertible into listed equity securities are eligible to be issued, however. The Exemption cannot be used for the distribution of subscription receipts, special warrants or convertible debentures.

Offering Document and Secondary Market Liability

An issuer intending to rely on the Exemption will be required to prepare and file with the applicable securities commissions the Offering Document describing, among other things, the details and price of the securities being offered, a brief summary of the issuer's business and any recent developments, any material facts not otherwise disclosed in the issuer's public disclosure, and the use of proceeds. The Offering Document must also include a certification, signed by the issuer's chief executive officer and chief financial officer, that both the Offering Document and the issuer's 12-month continuous disclosure record contain disclosure of all material facts about the securities being distributed and do not contain a misrepresentation. The Offering Document must be filed on SEDAR and on the issuer's website prior to soliciting any purchasers and no later than three business days after the date of the Offering Document.

While the applicable securities commissions would not review the Offering Document as it would in the case of a prospectus, the Offering Document will be considered a "core" document under the secondary market civil liability regime, and the issuer would still attract primary and secondary market civil liability if the Offering Document or the issuer's continuous disclosure record contained a misrepresentation. As recourse, purchasers will have the right to either damages against the issuer (and in certain jurisdictions, its officers that sign the offering document and directors) or rescission. As with most other prospectus exemptions, there is no statutory liability on dealers. However, they must perform due diligence in order to meet suitability obligations under securities legislation, and they may be subject to common law liability and reputational risk.

Additional Filing Requirements

Similar to a private placement, an issuer that has relied on the Exemption will be required to file a Form 45-106F1 Report of Exempt Distribution within 10 days of closing, including a completed Schedule 1 with the purchaser information.

Key Takeaways

Although the Exemption will be available to eligible issuers of all sizes, the following practical benefits will mainly benefit smaller issuers in the Canadian public markets:

• Greater cost efficiencies. Issuers can expect to realize cost efficiencies, as there is no requirement for an investment dealer to facilitate the purchase and sale of securities, and a prospectus does not need to be prepared and filed;
• Greater access to capital. Smaller issuers will have easier access to a broader group of investors with the inclusion of retail investors. Given that securities issued in reliance on the Exemption are freely tradable, this would likely be an attractive option for investors;
• Freely trading securities. Given how costly it is to conduct a prospectus offering, smaller issuers may complete more private placements in reliance on the Exemption as they will still be able to issue freely tradable securities without the significant costs associated with a prospectus offering;
• Enhanced disclosure. Smaller issuers would have a greater incentive to maintain an up-to-date continuous disclosure record, given that it is a requirement for relying on the Exemption. This is bolstered by the fact that purchasers have civil remedies in the event of a misrepresentation; and
• No investment dealer required. While issuers may complete a financing on a non-brokered basis in reliance on the Exemption, issuers will need to consider whether they are in the business of trading securities and require registration as a dealer under applicable Canadian securities legislation.

Provided that all necessary approvals are obtained, the amendments to NI 45-106 to enact the Exemption will come into force on November 21, 2022.