On November 21, 2013, the securities regulators of all of the jurisdictions of Canada (except Ontario and Newfoundland and Labrador) published for comment Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders. Under the proposed exemption, issuers listed on the TSX Venture Exchange would be allowed to distribute securities to their existing security holders without being subject to the usual obligation to prepare an offering document (such as a prospectus or rights offering circular), so long as they meet the requirements of the exemption. 

Background

The regulators note that TSXV issuers rarely conduct prospectus offerings after their initial public offering.  Also, due to the time and cost involved in preparing the mandatory offering documents, these issuers do not generally make use of the rights offering exemption or the offering memorandum exemption to raise capital from retail investors. As a result, retail investors have limited opportunity to invest directly in TSXV issuers, and TSXV issuers are denied a potential source of capital.

Given this reality, the only option for retail investors to invest in TSXV issuers remains the secondary market, which means that they must pay brokerage commissions and may not benefit from the discounted pricing and the warrant “sweeteners” typically available in private placements to accredited investors.

The proposed exemption

The proposed exemption will be available to an issuer whose equity securities are listed for trading on the TSXV, is a reporting issuer in at least one jurisdiction of Canada and has filed all timely and periodic disclosure documents under the applicable securities laws. In addition, the distribution must abide by certain key conditions including the following:

  • The offering must consist of a listed security or a unit consisting of a listed security and a warrant to acquire a listed security. The investor must confirm in writing to the issuer that, on or before the “record date”, the investor holds the same class and series as the listed security to be distributed. The record date will be a date prior to the date of the announcement of the offering.  The regulators are still considering what would be the appropriate record date and will use the comments received during the comment period to make their decision regarding this matter. 
  • The issuer must issue and file a news release, which must include reasonable details of the proposed distribution and proposed use of net proceeds.
  • The aggregate amount invested by the investor in the last 12 months under the exemption may not exceed $15,000, unless the investor has obtained advice regarding the suitability of the investment from a registered investment dealer.
  • The investor must purchase the security as a principal and pay the acquisition cost in cash at the time of the distribution.
  • The investor must be provided with certain rights of action in the event the issuer makes a misrepresentation in its continuous disclosure record. An offering document is not required, but an issuer who provides one voluntarily will be subject to certain rights of action of the investor if the document contains misrepresentations. 
  • A report of exempt distribution must be filed with the regulator no later than 10 days after the distribution.

The first trade of a security acquired under the proposed exemption will be subject to the four month hold resale restrictions under section 2.5 of National Instrument 45-102 – Resale of Securities, as is the case in most other capital raising prospectus exemptions. 

The regulators note that the proposed exemption covers only the prospectus requirement and that no corresponding exemption from the dealer registration requirement is being proposed. 

Comment period

Interested parties are invited to comment on all aspects of the proposed exemption including the appropriate record date for the exemption, whether TSXV issuers would actually be interested in using the proposed exemption, whether the $15,000 limit is the appropriate limit, whether it is appropriate that there be no investment limit if an investor receives suitability advice, and whether the mere fact of being a current security holder of an issuer enables an investor to make a more informed investment decision regarding the issuer. The regulators are also requesting comment on whether conditions regarding the structure of the financing (minimum or maximum price, maximum dilution, etc.) would be appropriate, as such conditions have not currently been proposed by the regulators.

Comments must be submitted in writing to the regulators before January 20, 2014.