Two recent initiatives of the Canadian securities regulators address the need for reporting issuers to raise capital from existing shareholders cost-effectively.
The first initiative is a Canadian Securities Administrators (the CSA) proposal to amend the rights offering regime to decrease the cost and time involved in undertaking a rights offering in the exempt market. The second development introduces in Ontario a new prospectus exemption that will allow reporting issuers, other than investment funds, to raise money from existing shareholders.
Rights Offerings Prospectus Exemption. The CSA is proposing amendments to the rights offering regime. The proposals will create a national prospectus exemption for rights offerings made by reporting issuers, other than investment funds. The purpose of the new exemption is to reduce the time and costs associated with rights offerings thereby making them a more attractive financing option for reporting issuers. The key features of the proposed exemption are:
- no prior regulatory review of documentation as currently required;
- a new form of notice will be given by the issuer that will provide security holders with basic offering information and will advise them how to electronically access the full circular that will be required to be certified;
- circular will not require business information due to availability of continuous disclosure record on SEDAR and will not be required to be sent to security holders;
- dilution limit of 100% of outstanding securities of the class in 12-month period prior to distribution compared to current 25% limit;
- exercise period of a minimum of 21 days and a maximum of 90 days;
- offer must be made pro rata to all security holders of the class;
- price must be lower than market price; and
- stand-by commitments may be permitted in certain circumstances.
The CSA is intending that statutory secondary market liability will apply to acquisitions under the proposed exemption. The prospectus exemption for rights offerings by non-reporting issuers will be repealed as it is not often used. Amendments to the rules relating to prospectus-qualified rights offerings will be amended to make such offerings subject to the same pricing restrictions that apply to prospectus-exempt offerings.
New Ontario Prospectus Exemption for Existing Shareholders. On February 11, 2015, there will be a new prospectus exemption in Ontario that will allow reporting issuers, other than investment funds, listed on specified exchanges (including the TSX, TSX-V and the Canadian Securities Exchange) to raise funds from existing security holders based on their public continuous disclosure record. The key terms of the exemption are:
- the offering must be of equity securities listed on the relevant exchange (or a unit consisting of the equity security and a warrant to acquire the equity security);
- the reporting issuer must have complied with its continuous disclosure obligations;
- an offering news release must be made that sets out in reasonable detail the terms of the offering, including the minimum and maximum number of securities and amount of gross proceeds, the principal uses of the proceeds assuming both a minimum or maximum offering and the issuer’s intention regarding allocation of the securities. While the Ontario Securities Commission has removed a proposed requirement that securities distributed under the exemption be allocated on a pro rata basis to existing security holders, they have included guidance on the fair and equal treatment of security holders. This guidance states that issuers are expected to develop procedures to ensure fair allocation;
- the offering must be made to all security holders as of a specified record date that must be at least one day prior to the announcement of the offering who hold a listed security of the same class to be offered;
- investors will have an investment limit of $15,000 in 12 months prior to the distribution unless the investor has obtained advice regarding suitability of the investment from a registered investment dealer;
- offering cannot result in dilution greater than 100% of the securities of the class offered; and
- there will be a four-month hold period on the re-sale of the securities;
- secondary market civil liability will apply to securities purchased under the exemption.
The Ontario exemption is harmonized with an exemption adopted earlier this year in all CSA jurisdictions except Newfoundland, but is not available to investment funds and has a cap on dilution unlike the exemption in the other jurisdictions.
Comments on the proposals are open until February 25, 2015.
The new exemption and the rights proposal are linked below: