The prospectus exempt rights offering regime will be significantly revised to address concerns that it is too expensive and time consuming.  The Canadian Securities Administrators (CSA) states that the amendments are intended to make prospectus exempt rights offerings more palatable for issuers while maintaining investor protections.  The amendments will repeal National Instrument 45-101 Rights Offerings (NI 45-101) – the revised rights offering prospectus exemption will be provided in an amended section 2.1 of National Instrument 45-106 Prospectus Exemptions (NI 45-106).

Principal Conditions of the Exemption

The new rights offering prospectus exemption is only available to non-investment fund reporting issuers that meet certain conditions.  The issuer must be a reporting issuer in Canada and it must be current in its continuous disclosure obligations.  In addition, the exercise period for the rights must be less than 21 days and more than 90 days and must commence the day after the rights offering notice is sent to security holders.  

The basic subscription privilege must be available, on a pro rata basis, to all security holders resident in Canada.  An additional subscription privilege (i.e. a privilege to subscribe for securities not subscribed for by any holder under the basic subscription privilege) may be included in the rights offering.  Under the additional subscription privilege, each holder of a right is entitled to receive no more than a pro rata portion of the securities available after giving effect to the basic subscription privilege.

The terms of the exemption allow for a stand-by commitment, which permits a stand-by guarantor to acquire the securities not subscribed for under the basic and additional subscription privileges.  The securities purchased under the stand-by commitment are subject to a new prospectus exemption provided in section 2.1.1 of NI 45-106.  Unlike the proposed amendments, securities purchased under the stand-by commitment prospectus exemption are not subject to a four-month hold period – the same is true of securities purchased under the rights offering prospectus exemption.

Dilution

An important change from the existing prospectus exempt rights offering regime is that the dilution limit is increased from 25% to 100%.  In the normal course and absent unusual circumstances, we would not expect the Toronto Stock Exchange to require security holder approval for dilution in excess of 25% under a prospectus exempt rights offering (unlike how we expect them to treat offerings under the new (in Ontario) existing security holder prospectus exemption, where we expect that security holder approval would be required for dilution over 25%).  Note that the TSX Company Manual rules on rights offerings would generally apply.

Rights Offering Notice

A rights offering notice must be provided to security holders in a new Form 45-106F14 Rights Offering Notice for Reporting Issuers.  The rights offering notice must be provided to all security holders eligible to receive rights under the rights offering.  The rights offering notice must be under two pages in length and it must be presented in a question and answer format.  The rights offering notice would contain certain prescribed language and would answer basic questions about the offering such as when and how a security holder can exercise their rights and how such security holder will receive their rights.  In Quebec, the rights offering notice must be provided in French or in French and English.

Rights Offering Circular

In addition, a rights offering circular must be filed concurrently with the rights offering notice in a new Form 45-106F15 Rights Offering Circular for Reporting Issuers.  The rights offering circular must also be presented in a question and answer format and information cannot be incorporated by reference.  The rights offering circular must disclose a variety of information about the issuer and the offering, including: (i) how the proceeds of the offering will be used; (ii) the particulars of how to exercise the rights offered; (iii) the attributes of the rights offered; (iv) the extent of insider participation in the offering; (v) the dilution that would be suffered by existing security holders should they not exercise their rights; (vi) the particulars of any stand-by commitment; and (vii) underwriting conflicts of interest.  If the rights offering circular is provided in Quebec, it must be translated in French.

News Release

On the closing date, or as soon thereafter as practicable, the issuer must issue and file a news release.  The news release must disclose: (i) the aggregate gross proceeds of the distribution; (ii) the number or amount securities distributed under the basic subscription privilege and under the additional privilege, respectively, to insiders, as a group, and to all other persons, as a group; (iii) the number or amount of securities distributed under any stand-by commitment; (iv) the number or amount of securities of the class issued and outstanding as of the closing date; and (v) the amount or any fees or commissions paid in connection with the distribution.

Rights Offerings by Non-Canadian Issuers

Issuers that have a minimal connection to Canada can allow Canadian security holders to participate in a foreign rights offering under a new prospectus exemption in section 2.1.2 of NI 45-106.  This new prospectus exemption is derived from section 10.1 of NI 45-101.  Both reporting issuers and non-reporting issuers may use this prospectus exemption so long as neither: (a) the number of beneficial security holders of the relevant class that are resident in Canada; nor (b) the number of securities beneficially held by security holders resident in Canada, exceeds 10% of all security holders or securities, respectively. 

If relying on this exemption, security holders resident in Canada should be furnished with all materials sent to any other security holders and such materials must be concurrently filed with the securities regulators.  In addition, the issuer must file a written notice certifying that it meets the conditions noted above.

For further information on the amendments, please see the CSA Notice of Amendment.