TSX Venture Exchange (TSXV), Canada's public venture market, has published a notice to issuers advising that it has implemented amendments to its policy on the use of rights offerings as a means of raising capital. These amendments are further to guidance TSXV issued in January 2016 following the adoption by Canadian securities regulators of a more flexible, streamlined process for a reporting issuer to conduct an exempt rights offering introduced in December 2015 (see our September 2015 MarketCaps). This comes at a time when TSXV is actively taking measures to revitalize Canada's public venture market through a series of targeted initiatives aimed at addressing current challenges in the marketplace (see our March 2016 and August 2016 MarketCaps).
Gowling WLG Focus
The new, streamlined process for reporting issuers to conduct rights offerings is a welcome development for reporting issuers who have historically conducted very few of these types of offerings in Canada, primarily due to the time and expense that was associated with such an offering. The amended TSXV policy enables TSXV issuers to utilize the streamlined rights offering exemption, subject to the additional requirements set forth in the amended policy.
We view such measures by Canadian securities regulators and TSXV to be in line with efforts to increase the attractiveness of the Canadian capital marketplace for early stage companies. As an international law firm, we support such initiatives to make the Canadian marketplace welcoming to investors and issuers around the world.
Background on Streamlined Rights Offering Process
In a rights offering, an issuer raises capital by offering rights to its existing shareholders to purchase securities at a later date. The new regime aims to make prospectus-exempt rights offerings more attractive to reporting issuers while maintaining investor protection. The most significant amendments to the exempt rights offering process introduced in December 2015 were the elimination of any requirement for prior regulatory review of the rights offering circular by Canadian securities regulators and an increase in the dilution limit of the applicable class of securities to be offered from 25% to 100% over a 12-month period. Other important aspects of the new, streamlined rights offering process include:
- A new form of offering notice must be filed with the securities regulators on SEDAR and mailed to securityholders.
- A simplified form of rights offering circular in Question & Answer format is prepared but does not get mailed to securityholders. Such rights offering circular must be filed with securities regulators on SEDAR but is no longer reviewed by securities regulators, although it remains subject to TSXV review as outlined in the amended TSXV policy discussed below.
- Once the notice is sent to securityholders and the notice and circular have been filed on SEDAR, the reporting issuer is permitted to commence the offering.
- The offering must remain open for a minimum of 21 days and a maximum of 90 days.
- For rights offerings of listed securities, the subscription price for shares issuable upon exercise of rights must be lower than the market price of such securities as at the time the notice is filed.
- The basic subscription privilege must be made available on a pro-rata basis to existing securityholders, resident in Canada, of the class of securities to be distributed upon the exercise of the rights.
- Shares issued under the exemption are subject to a seasoning period on resale, and are thus generally free trading shares.
- Stand-by commitments are permitted subject to certain requirements, such as confirmation by the reporting issuer that the stand-by guarantor has the financial ability to perform its obligations under the stand-by commitment.
TSXV has now implemented amendments to TSXV Policy 4.5 Rights Offerings. These amendments are further to guidance TSXV issued on January 18, 2016 following the introduction by Canadian securities regulators on December 8, 2015 of a more flexible, streamlined process for a reporting issuer to conduct a rights offering on a prospectus-exempt basis.
Of note, while Canadian securities regulators no longer require prior regulatory review and approval of a rights offering circular before it is sent to an issuer's securityholders, TSXV still requires the pre-clearance of rights offering documents, including the rights offering notice, the rights offering circular and a draft press release outlining the proposed terms and timing of the rights offering. These documents must be filed in draft form with TSXV prior to finalization in order to provide sufficient time for TSXV to review the pricing, mechanics and timing of the rights offering.
Other substantive amendments to the TSXV's rights offerings policy include:
- The deadline by which deficiencies in the rights offering documents must be resolved with the TSXV is now 5 trading days prior to the record date, rather than 7 trading days prior to the record date. This is in line with Canadian securities regulators’ goal of making rights offerings more attractive to reporting issuers by streamlining the review and approval process.
- The subscription price for a security to be acquired on the exercise of rights cannot be less than $0.01.
- The exercise price for a warrant forming part of a unit to be acquired on the exercise of a right must not be less than the market price of the issuer's listed shares prior to the news release announcing the rights offering, and cannot in any case be less than $0.05.
- The requirement that securityholders receive exactly one right for each security held has been removed and accordingly fractions of rights may be issued provided that the number of rights required to purchase a security is a whole number.
- Rights may be, but are not required to be, listed for trading on TSXV. However, all rights must be transferable.
- Shareholder approval will not be required if a new control person of the issuer (generally, a person or group of persons that hold more than 20% of the outstanding voting shares of the issuer) will be created as a consequence of a stand-by commitment, provided that the rights are listed for trading on TSXV and the subscription price for the rights is at a “significant discount” to the market price. A significant discount would be equal to at least the maximum discount to market price allowed for private placements (15% to 25% depending on the market price). If either of these criteria is not satisfied, TSXV may require prior shareholder approval.
- Before TSXV will accept a rights offering which includes a stand-by commitment, any individual who may own or control securities representing 10% of the voting rights attached to all outstanding voting securities of the issuer on the completion of the offering must first file with TSXV a Personal Information Form or, if applicable, a Declaration.
Although the new, streamlined rights offering exemption is a matter of Canadian securities law, TSXV listed issuers are still required to follow the policies of TSXV. In particular, an issuer that intends to undertake a rights offering must keep in mind that TSXV policy has not gone as far as Canadian securities regulators in removing pre-offering review and approval procedures. As TSXV pre-clearance of the rights offering documents is required before a record date can be set, if an issuer is considering conducting an exempt rights offering to its current securityholders, it may be advisable for the issuer or its counsel to have preliminary discussions with TSXV.
These amendments to TSXV Policy 4.5 Rights Offerings facilitate the adoption of the new, streamlined rights offering process and complement TSXV’s revitalization initiative. The barriers that previously made rights offerings a seldom used means of raising capital have generally been removed.
Gowling WLG research has shown there has been a significant increase in the number of issuers that have elected to take advantage of the new, streamlined rights offering process to date in 2016 following the adoption by Canadian securities regulators in December 2015. The recent amendments appear to have breathed new life into what was once a rarely used process. We estimate that it is now possible to complete an exempt offering in less than 1 month (rather than 2-3 months under the old exemption), making it a viable alternative to a conventional private placement.