Canadian securities regulators have announced a new exemption that, upon coming into force on Nov. 21, 2022, will permit listed issuers to make public offerings of freely tradeable securities without a prospectus. This new prospectus exemption (the "Listed Issuer Financing Exemption") will be subject to several restrictions. Offerings under the Listed Issuer Financing Exemption will be made largely in reliance on an issuer's continuous disclosure record, supplemented by a short offering document that will not be reviewed by securities regulators before use. The Listed Issuer Financing Exemption is intended to serve as an alternative to the short form prospectus regime. It aims to reduce both the cost and the regulatory burden for smaller Canadian public companies when accessing the public markets, and to encourage more retail investor participation in securities offerings.
To make use of the Listed Issuer Financing Exemption, an issuer must have equity securities listed on a Canadian exchange, and must have at least a 12-month reporting history. Certain issuers are not eligible, including investment funds, and issuers that have been a special purpose acquisition company or a capital pool company in the 12 months before the offering. At the time of the offering, the issuer must reasonably expect that it will have available funds to meet its business objectives and liquidity requirements for at least 12 months. An issuer may set a minimum offering amount so that it will have sufficient funds to meet this requirement.
Although open to any type of listed issuer, the Listed Issuer Financing Exemption is designed to benefit junior reporting issuers by giving them lower-cost access to retail investors for smaller offerings. However, with no investment limits imposed, investors of all types may be interested in taking advantage of the Listed Issuer Financing Exemption so they may acquire freely tradeable securities.
The offering document is intended to be short. In fact, guidance from the regulators indicates that they generally expect it to be no longer than about five pages. It will also not be reviewed by Canadian securities regulators before use. Unlike under the short form prospectus regime, an issuer will not need to file an annual information form (AIF) to make an offering. However, the offering document, combined with the issuer's continuous disclosure record, must contain disclosure of all material facts relating to the securities being distributed and must not contain a misrepresentation.
In the event of a misrepresentation, investors will have rights to rescind their purchases or rights to damages. An issuer will also be liable to purchasers in the secondary market for a misrepresentation, under the secondary market civil liability regime.
Restrictions on the use of the Listed Issuer Financing Exemption include:
- The maximum amount that may be raised, measured over a 12-month period, is $5 million or, if greater, 10 per cent of the issuer's market capitalization up to a maximum of $10 million;
- It may not be used to dilute the issuer's outstanding listed equity securities by more than 50 per cent over a 12-month period;
- The securities offered may only be listed equity securities, or units consisting of listed equity securities and warrants convertible into those securities; and
- The proceeds of the offering may not be used for a significant acquisition or a restructuring transaction under securities laws, or for any other transaction for which the issuer seeks security holder approval.
In addition to these restrictions, an issuer must also comply with any restrictions and procedures imposed by the exchange on which its securities are listed.
No registration exemption
There is no requirement that a registered dealer, such as an investment dealer or an exempt market dealer, be used to offer securities under the new rules. However, issuers conducting an offering without a registered dealer will need to ensure that their offering activities do not trigger the registration requirement.
As with other prospectus-exempt offerings, an issuer will need to file a report of exempt distribution that includes purchaser information. No hold period will apply to the securities offered; however, existing securities laws are designed to ensure that subscribers purchase securities with investment intent and not with a view to immediate resale.
The Listed Issuer Financing Exemption will provide a more efficient method of capital raising for junior reporting issuers, without the time and cost impediments of preparing a short form prospectus. The new exemption will come into effect on Nov. 21, 2022, provided that all necessary ministerial approvals are obtained.