The Canadian Securities Administrators (CSA) announced the implementation of the new more flexible, streamlined process for a reporting issuer to conduct a rights offering. The amendments are largely consistent with the proposals previously published for comment on Nov. 27, 2014. See our article from December 2014 for a summary of the proposals.
In a rights offering, an issuer raises capital by offering rights to purchase securities to its existing securityholders. Rights offerings are recognized as the most equitable method to existing securityholders for a company to raise funds as it allows existing shareholders the opportunity to avoid being diluted. Despite its merits, we have seen very few rights offerings in Canada in recent years. The new regime addresses concerns that conducting a rights offering has been too time-consuming and expensive in Canada. It will make prospectus-exempt rights offerings more attractive to reporting issuers while maintaining investor protection.
The Streamlined Rights Offerings Exemption
The amendments create a steamlined rights offering prospectus exemption. The most significant change is the elimination of any requirement for prior regulatory review of the rights offering circular. Based on the CSA’s review of data on rights offerings conducted in recent years, this change alone could cut the process by 40 days on average. Some regulators intend to review rights offering circulars on a post-distribution basis to understand how issuers use the new rights offering exemption and to monitor compliance.
Other important aspects of the new rights offering exemption are:
- Reporting issuers are required to file a new form of notice with regulators that must also be sent to securityholders with instructions on accessing the rights offering circular online.
- The amendments adopt a new simplified rights offering circular form in a question and answer format. The circular must be filed on SEDAR but is not required to be sent to securityholders.
- The dilution limit is increased to 100% of the applicable class of securities to be offered, up from the current 25% limit on dilution.
- The exemption includes statutory secondary market civil liability for misrepresentation. Subscribers under a rights offering would have a right of action for misrepresentations in the rights offering circular and other continuous disclosure documents.
- Once a notice is sent to securityholders and the notice and circular have been filed on SEDAR the reporting issuer may commence its rights 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 for such securities as at the time the notice is filed. For rights offerings of unlisted shares, the subscription price must be lower than the fair value at the time of filing of the notice provided this requirement does not apply if insiders are restricted from increasing their proportionate interest in the public company through the rights offering or a stand-by commitment.
- A reporting issuer must make the basic subscription privilege available on a pro rata basis to all existing securityholders.
- Stand-by commitments are still permitted subject to certain requirements such as a confirmation by the reporting issuer that the stand-by guarantor has the financial ability to carry through with its stand-by commitment.
- Shares issued under the exemption would be subject to a seasoning period on resale. In most cases this means the shares issued on exercise of the rights will be freely tradeable.
- Issuers will be required to disclose in a circular any material facts and material changes that have not yet been generally disclosed and include a statement that there are no undisclosed material facts or material changes.
The new rights offering exemption is not available to non-reporting issuers or investment funds.
Stand-by Guarantor Prospectus Exemption
The amendments include a new separate prospectus exemption for securities issued to a stand-by guarantor that is not a current securityholder. Securities issued to stand-by guarantors under the new exemption will be subject to the same seasoning period on resale as securityholders who exercise their subscription privileges under a rights offering, so long as the stand-by guarantor is not acquiring the securities with a view to re-selling the securities.
Minimal Connection Exemption
The amendments include a prospectus exemption for issuers conducting a rights offering where there is a minimal connection to Canada. Reporting issuers and non-reporting issuers will be able to use this exemption so long as neither the number of beneficial securityholders that are resident in Canada nor the number of securities beneficially held by securityholders resident in Canada exceeds 10% of all securityholders or securities, as the case may be.
Provided all necessary ministerial approvals are obtained, these new rights offering exemptions will come into force on Dec. 8, 2015.