On September 8, 2022, the Canadian Securities Administrators (the “CSA”) announced the adoption of a new prospectus exemption for issuers listed on a Canadian stock exchange[1]. The goal of the new exemption is to provide a more efficient way for issuers to raise smaller amounts of capital and have better access to retail investors, while also reducing regulatory burden and associated costs.

Subject to receiving all necessary Ministerial approvals, the exemption will become effective on November 21, 2022.

The purpose of the exemption is to provide, for certain issuers, the option to raise capital relying on their continuous disclosure filings. While the exemption promises to create another flexible and efficient method to access public capital, we note that the use of the prospectus exemption might not be available to all issuers and there are limits on how much an issuer can raise relying on the exemption in any one year period (discussed in further detail below).

The prospectus exemption will be available to an issuer if:

a) it has been a reporting issuer in a Canadian jurisdiction for at least 12 months;

b) it has listed equity securities on a recognized stock exchange in Canada;

c) it has active business operations (e.g., its operations have not ceased, and it is not a capital pool company or special purpose acquisition company) and it has not recently completed a restructuring transaction with a person or company that did not have active business operations;

d) it is not an investment fund;

e) it has filed all continuous disclosure documents required under Canadian securities legislation;

f) it has filed a short offering document; and

g) it does not intend to allocate its available funds to complete a significant acquisition, a restructuring transaction or any other transaction for which security holder approval would be required.

The maximum amount that can be raised by an issuer relying on this new exemption in any one year period is the greater of $5 million or 10% of its market capitalization, to a maximum of $10 million. In addition, a distribution using this exemption, combined with all other distributions made under this exemption in any one year period, may not result in an increase of more than 50% in the issuer’s outstanding listed securities.

An issuer who wishes to use this exemption must also set a minimum offering amount so that, following the distribution, it reasonably expects that it will have sufficient available funds to meet its business objectives and liquidity requirements for a period of 12 months.

Before soliciting an offer to purchase, issuers will need to (i) file with the securities regulatory authorities in each jurisdiction where the offering is being conducted: (A) a news release announcing the distribution that contains prescribed language[2], and (B) a completed short offering document (the “Short Offering Form”) in the form prescribed under Form 45-106F19 - Listed Issuer Financing Document[3]; and (ii) if the issuer has a website, post the completed Short Offering Form on its website. Issuers will also need to make sure that all information provided to purchasers in the Short Offering Form and in certain of their continuous disclosure documents disclose all material facts about the securities being offered. If the Short Offering Form contains misrepresentations, purchasers of securities would have the right to rescind their purchase or a right to claim damages from the issuer.

Securities that are issued under the exemption will be freely tradeable (i.e. not subject to resale restriction under National Instrument 45-102 - Resale of Securities). Issuers are only permitted to offer listed equity securities and units consisting of listed equity securities and warrants to purchase the listed equity securities under the exemption, and may not offer subscription receipts, special warrants or convertible debentures.

There is no requirement for a dealer to be retained in connection with an offering made in reliance on the listed issuer exemption. The CSA has determined to keep the exemption flexible to allow issuers to conduct securities offerings as they choose, whether through a registered dealer or on their own. However, issuers undertaking offerings in reliance on the listed issuer exemption without a registered dealer will nevertheless need to assess, using existing CSA guidance[4], whether they are in the business of trading securities and therefore obligated to satisfy the registration requirement under applicable securities laws.

The exemption was developed by the CSA further to comments received from CSA Consultation Paper 51-404 - Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers[5].