On November 27, 2014, the Canadian Securities Administrators (CSA) published for comment proposed amendments to various National Instruments which, if adopted, would overhaul how rights offerings under the rights offering prospectus exemption are conducted. The amendments would also have minor revisions to the requirements of rights offerings conducted by way of prospectus.  The CSA indicate that the amendments are meant to make the rights offering exemption more accessible by streamlining the process.

A rights offering is a financing where the issuer grants to its current securityholders one right per security held. The right or a certain number of rights would then be exercisable prior to the expiry date to purchase an additional security of the issuer at a certain subscription price. The issuer can issue these rights under a prospectus or by using a prospectus exemption.

The proposed amendments include amendments to National Instrument 41-101 General Prospectus Requirements (NI 41-101), National Instrument 44-101 Short Form Prospectus Distributions, National Instrument 45-102 Resale Restrictions, Companion Policy 45-106CP to NI 45-106 and Companion Policy 41-101CP to National Instrument 44-101.

Summary of Amendments

Currently, National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) provides a specific prospectus exemption (Current Exemption) for rights offerings which comply with National Instrument 45-101 Rights Offerings (NI 45-101). However, the CSA note that the Current Exemption is not commonly utilized because rights offerings complying with the Current Exemption are time consuming and costly. Under the proposed amendments, NI 45-101 would be repealed and the Current Exemption would be replaced by a new exemption in NI 45-106 (New Exemption) that would substantially change the requirements for a prospectus exempt rights offering.

Below is a summary of the major changes under the New Exemption:

  • Availability: Only reporting issuers, other than certain investment funds, would be able to utilize the New Exemption. In addition, the Current Exemption would be repealed, meaning there would no longer be an ability for non-reporting issuers to undertake a rights offering under a specific rights offering prospectus exemption.
  • Notice and Circular: Under the Current Exemption, the issuer is required to send to each securityholder a circular in the prescribed form which gives details of the rights offering and information on the issuer. Prior to mailing, each of the relevant securities commissions must review and accept the circular which significantly increases the time required to complete the offering. The CSA indicate that average time between the filing of the initial draft circular and the issuer receiving the notice of acceptance by the regulator is 40 days. Under the New Exemption, the issuer would only be required to send to each securityholder a prescribed notice which provides basic information about the offering and how to access the rights offering circular electronically. In addition, a revised form of offering circular, which provides information on the rights offering in a question and answer format but does not provide information on the business of the issuer, would be filed and be available on SEDAR. Neither the circular nor the notice would be reviewed by the regulators prior to use.
  • Dilution: The New Exemption would allow issuers to rely on the New Exemption to increase the number of securities outstanding in the class of securities being issued upon exercise of the rights by up to 100% during a 12 month period. The Current Exemption allows for an increase of only up to 25%.
  • Offer to All Security Holders: The Current Exemption does not explicitly require the issuer to offer rights to all securityholders, although Companion Policy 45-101CP to NI 45-101 discusses a discretionary guideline. The New Exemption imposes a requirement to offer rights to all securityholders. In practice, issuers may require securityholders outside of Canada to provide certain information regarding their eligibility to receive the rights in the relevant foreign jurisdiction before the rights are issued to them. We understand that this would not change under the New Exemption.
  • Price: If the issuer is listed on a marketplace, the New Exemption would require the subscription price for the security issuable on exercise of a right to be less than the market price on the date the notice described above is filed. For unlisted issuers, the subscription price must be lower than the fair value at the time the relevant notice is filed unless insiders are not allowed to increase their proportionate interest in the issuer under the rights offering. Under the Current Exemption, listed issuers are only required to have a subscription price less than the market price if insiders are permitted to increase their proportionate interest under the rights offering.
  • Closing News Release: The issuer is obligated to issue a comprehensive news release under the New Exemption with certain prescribed information.
  • Statutory Liability: The form of circular prescribed by the New Exemption includes a certificate, similar to that for a prospectus, certifying that the circular contains no misrepresentations. In addition, the CSA are proposing that statutory civil liability for secondary market disclosure provisions would apply to securities purchased under the rights offering to ensure purchasers relying on the circular have rights of action for a misrepresentation in the circular and in the issuer’s continuous disclosure.
  • Stand-By Exemption: Both the Current Exemption and the New Exemption allow the issuer to enter into a stand-by commitment subject to certain requirements whereby a stand-by guarantor would agree to purchase any securities not otherwise purchased by the rightsholders under a prospectus exempt rights offering. The CSA are proposing to create a new exemption for any securities issued to a stand-by guarantor, who is not already a securityholder (and is not a registered dealer), pursuant to a stand-by commitment as part of a rights offering under the New Exemption. Securities acquired under this stand-by exemption would be subject to a restricted period on resale.

The proposed amendments would also move all requirements related to rights offerings distributed by way of prospectus to NI 41-101. Substantively, the only changes to prospectus rights offerings would be with respect to pricing which would be the same as under the New Exemption.