It’s now unanimous: effective February 11, 2015, the Ontario Securities Commission (“OSC”) will adopt a new capital raising prospectus exemption1 (the “Exemption”) for issuers listed on the Toronto Stock Exchange (the “TSX”), TSX Venture Exchange (the “TSXV”), the Canadian Stock Exchange and Aequitas NEO Exchange (collectively, the “Exchanges”). A comparable exemption was adopted in all other provinces and territories in March 20142.
The core concept of the new exemption is that an investor who holds a security listed on an Exchange (a “Listed Security”), however acquired, may subscribe for additional Listed Securities, or for units (each unit comprised of the Listed Security and a warrant to acquire the Listed Security – a “Unit”), without the need for the issuer of the Listed Securities to prepare a prospectus or other offering document.
The Exemption marks an additional attempt by securities regulatory authorities to open up the financing avenues available to issuers, in particular smaller issuers, while still aiming to provide a sufficient degree of protection for ordinary investors.
Conditions for Use of the Exemption
The Exemption is subject to a number of conditions including:
- The issuer must be a reporting issuer in at least one jurisdiction of Canada;
- The issuer must have a class of equity securities listed on one of the Exchanges;
- The issuer must have filed all timely and periodic disclosure requirements as required under applicable securities laws;
- The offering can only consist of the Listed Securities or Units;
- A distribution of Listed Securities pursuant to the Exemption must not result in an increase of more than 100% in the number of outstanding Listed Securities of the same class;
- The issuer must issue a news release disclosing the proposed offering, including the fact that the Exemption is intended to be relied on, details of the use of proceeds, the number and pricing of the securities to be issued (including minimum and maximum amounts, if applicable), and how the issuer intends to allocate securities and deal with any oversubscriptions;
- Each holder of the Listed Security as of a record date of at least one day prior to the announcement of the offering must be permitted by the issuer to subscribe for the Listed Securities or Units to be offered (note that this condition differs from the exemption available in all the other jurisdictions in Canada, where the issuer is only obligated to make the offer available to the holders of the Listed Security);
- The investor must purchase the applicable securities as principal and must confirm in writing that as of the record date the investor held the Listed Security;
- If the investor has not received advice as to the suitability of the investment from a registered dealer, the investor must not invest more than $15,000 in the aggregate in securities of the issuer using the Exemption in the preceding 12 months;
- The issuer must provide the investor with rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record;
- If the issuer voluntarily provides an offering document in connection with the offering, the issuer must describe applicable statutory rights of action and provide the investor with rights of action in the event of a misrepresentation in the offering document;
- The subscription agreement for the offering must contain a certificate of the issuer that declares that the issuer’s continuous disclosure documents do not contain a misrepresentation, and must certify that there are no material changes or material facts related to the issuer that have not been generally disclosed;
- The rights of action applicable in Ontario in respect of the issuer’s continuous disclosure documents will be available to an investor;
- If any offering material, other than a subscription agreement, is provided to an investor in connection with a distribution using the Exemption, that offering material must be filed with the securities regulatory authority no later than the day it was first provided to the investor; and
- The Exemption is not available for distributions in Ontario where the issuer is an investment fund.
Any securities issued pursuant to the Exemption will be subject to a 4-month hold period, and the issuer will be required to file a report of exempt distribution within 10 days of completion of the offering.
The OSC has commented in a Companion Policy that although there is no requirement that an issuer make the offer on a pro rata basis to its security holders, “all security holders of the same class of securities must be treated fairly and in a manner that is perceived to be fair (…)”.3 In order to support the fair treatment of all security holders, the OSC recommends that an issuer establish policies to ensure the fair allocation of investment opportunities among security holders.
The OSC also notes that there is no requirement that an issuer accept all subscriptions from each security holder, regardless of how small the subscription is. However, in order to avoid any question as to whether an offering was made available to all security holders, the OSC suggests clear disclosure of the minimum subscription amount in the news release.
The rules are silent on an appropriate offering price. However, in the context of rights offerings4 where each security holder is issued a right to subscribe for additional securities, the Canadian securities regulators have recently proposed rules that require the exercise price of the rights to be set at a discount to the current market price. This requirement was included to promote the fair treatment of all security holders. Issuers that propose to rely on the Exemption will be mindful that any offering price at or above the current market price may discourage participation by a number of security holders.
An offering pursuant to the Exemption will also require compliance with the requirements of the Exchanges applicable to all private placements, including minimum offering price and requirements for security holder approval for offerings that exceed certain thresholds (including where security holders could end up exercising control over 20% or more of the outstanding voting securities).
Since the adoption of the Exemption by the Canadian jurisdictions other than Ontario, there have been relatively few distributions which have relied on the Exemption. Reports of distributions filed with the British Columbia Securities Commission indicate that ten issuers have completed offerings to existing security holders which have relied on the Exemption. With the adoption of the Exemption in Canada’s largest capital market jurisdiction and the Exemption now being available across Canada, we would expect an increase in the number of offerings which rely on the Exemption.