On June 4, 2020, the Canadian Securities Administrators ("CSA") published final amendments (the "Amendments") to National Instrument 44-102 - Shelf Distributions ("NI 44-102") that, 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 equity securities into the market on a stock exchange with greater flexibility and speed than more traditional methods, providing more timely access to public capital which may be substantially beneficial, particularly during the COVID-19 pandemic. ATM offerings were identified as an area of focus in the CSA's consultation on reducing the regulatory burden for non-investment fund issuers and the CSA subsequently published proposed amendments to NI 44-102 to streamline the ATM offering process in its Notice and Request for Comment dated May 9, 2019 (the "Proposed Amendments").
Subject to receiving all necessary Ministerial approvals, the Amendments will become effective on August 31, 2020.
Highlights of the Amendments
The Amendments (discussed in more detail below under "Summary of the Amendments") make ATM offerings more accessible to Canadian issuers by:
- (i) 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;
- (ii) removing the limit in the existing rules for ATM offerings on 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 securities 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");
- (iii) allowing issuers conducting ATM distributions to report certain information about an ATM distribution on a quarterly basis instead of on a monthly basis; and
- (iv) permitting non-redeemable investment funds ("NRIFs") and exchange-traded mutual funds ("ETFs") that are not in continuous distribution to undertake ATM offerings.
The Amendments also provide for a closer alignment with the more issuer-friendly regulatory scheme for ATM offerings in the United States, thereby leveling the playing field for issuers listed only in Canada and providing issuers that are listed in Canada and the United States with a more realistic regulatory framework to pursue a cross-border ATM program.1
Key differences between the Proposed Amendments and the Amendments
After receiving and considering comments on the Proposed Amendments, the CSA altered the Amendments from the Proposed Amendments in the following material respects:
- Liquidity Threshold
The CSA tabled 2 options with respect to the imposition of a liquidity threshold on ATM offerings in the Proposed Amendments:
- The first option required that: (i) the distributed security in the ATM offering be a highly-liquid security (as defined in the Proposed Amendments); or (ii) the aggregate number of securities of the class distributed in the ATM offering on any trading day 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.
- The second 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 CSA has decided to adopt the second option in the Amendments; taking the view "that issuers are not expected to conduct ATM offerings that will have a material impact on the market price of their securities" and "investment dealers, who must underwrite all ATM distributions, are expected to have the experience and expertise in managing orders to limit any negative impact on market integrity, and are also prohibited from engaging in conduct that may disrupt a fair and orderly market." However, to prevent potential abuses, the CSA intends to monitor ATM distributions, with a particular focus on distributions that may have had a material impact on the price of the issuer's securities where the distribution was not publicly disclosed prior to it being made.
- Clarification on Application to Investment Funds
As previously noted, and consistent with the Proposed Amendments, all non-redeemable investment funds and ETFs that are not in continuous distribution will be able to rely on the Amendments and conduct ATM offerings. In addition, the CSA has clarified in the Amendments that mutual funds that are traded on an exchange that are in continuous distribution, and therefore meet the definition of an "ETF" in National Instrument 41-101 - General Prospectus Requirements ("NI 41-101") will also be able to rely on the Amendments but will be required to comply with all requirements applicable to an ETF, including the requirement for dealers acting as agents for a purchaser to deliver ETF facts documents under section 3C.2 of NI 41-101. Further, the CSA indicated in the Amendments that a mutual fund that is traded on an exchange that frequently makes ATM distributions would be considered to be in continuous distribution and therefore must also comply with all ETF requirements.
Lastly, the CSA has added a requirement in the Amendments that investment funds conducting ATM offerings must include a statement in the prospectus that any ATM distributions will be conducted in accordance with the anti-dilution offering price restrictions in paragraph 9.3(2)(a) of National Instrument 81-102 - Investment Funds ("NI 81-102").
Summary of the Amendments
The Amendments will replace the entirety of Section 9 of NI 44-102. The material changes are as follows:
- Removal of the 10% Aggregate Cap.
- Codifying exemptive relief currently required by issuers and
dealers wishing to conduct ATM offerings, including exemptions:
- for the underwriter from the requirement to deliver a prospectus to purchasers in a distribution of securities; and
- for the issuer and underwriter from certain of the prospectus form requirements, including a relaxation of the form of statement of rights.
- Issuers conducting ATM distributions will now be required to report certain information about an ATM distribution on a quarterly basis instead of on a monthly basis.
- Issuers will be required to identify news releases disclosing information that constitutes a "material fact" as "designated news releases" in order to incorporate material facts by reference into an ATM prospectus.
- Permit ATM offerings for NRIFs and ETFs that are not in continuous distribution
The Amendments will not otherwise modify the operational or regulatory requirements applicable to NRIFs or ETFs and such issuers will still be subject to existing requirements in NI 81-102 and otherwise, such as prohibiting the issuance of new securities at a price less than the fund's net asset value per security.
The Amendments do not provide any automatic exemption from the French translation requirements which may apply to ATM offerings which, historically, have been subject to certain discretionary exemptions of the Autorité des marchés financiers, subject to certain conditions.
While the Amendments promise to create another flexible and efficient method to access public capital, we note that use of an ATM program might not be available to all issuers. In order to be eligible to establish an ATM program, an issuer must also meet the requirements to file and be receipted for a shelf prospectus, which requires, among other things, that the issuer has sufficient resources to meet its short-term liquidity requirements, which will vary depending on the circumstances of each issuer.2
1 The Ontario Securities Commission noted in its commentary to the Proposed Amendments that at the time the Proposed Amendments were published 22 of 30 of the ATM offerings initiated by Canadian or cross-listed issuers since 2010 were exclusively conducted in the United States.
2 See CSA Staff Notice 41-307 - Corporate Finance Prospectus Guidance - Concerns regarding an issuer's financial condition and the sufficiency of proceeds from a prospectus offering and Sections 61(1) and 61(2)(c) of the Securities Act (Ontario).
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Originally published June 15, 2020
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