On November 21, 2013, the securities regulatory authorities in all Canadian jurisdictions, with the exception of Ontario and Newfoundland and Labrador (the “Participating Jurisdictions”), published for comment Multilateral CSA Notice 45-312 (the “Notice”). The Notice sets out a new proposed prospectus exemption that would allow issuers listed on the TSX Venture Exchange (“TSX-V”) to raise capital through the distribution of securities to their existing security holders.
Under Canadian securities rules, issuers may only issue securities by filing and obtaining a receipt for a prospectus or pursuant to an available prospectus exemption. The most commonly used exemption for TSX-V issuers is the “accredited investor” exemption, which permits the issuance of securities to investors that meet certain specified financial thresholds. Under the current rules, if a TSX-V issuer wishes to raise capital through the distribution of securities to investors who are not accredited investors, it generally must use either a prospectus or a prospectus exemption that requires a disclosure document, such as an offering memorandum, short form offering document or a rights offering circular.
Data compiled by the Canadian Securities Association, the umbrella organization that represents all provincial securities commissions (the “CSA”), indicates that TSX-V issuers generally do not use the prospectus exemptions that require the preparation of an additional disclosure document and, following their initial public offering, generally do not conduct prospectus offerings. It is acknowledged that this is likely due to the time and cost involved in preparing the required offering document, especially if a financing fails and the costs are payable regardless. Based on this data and following discussions with market participants, including local advisory committees, the CSA has acknowledged and recognized that the proposed prospectus exemption would likely improve access to funding for junior issuers.
The CSA also acknowledges in the Notice that under the current rules retail investors (i.e. non-accredited investors) are not able to acquire the warrant “sweeteners” that are typically issued with shares in private placements to accredited investors, must buy securities of TSX-V issuers on the secondary market with no discount and must pay brokerage commissions in connection with any secondary market purchases. There is also recognition in the Notice that, as a result, TSX-V issuers do not have access to a potential source of capital.
The proposed exemption
Under the new exemption proposed by the regulatory authorities in the Participating Jurisdictions, TSX-V issuers would be permitted to distribute securities to existing security holders, relying on their existing continuous disclosure record, and would not be required to prepare an additional offering document. Some of the key conditions to the use of the proposed exemption are:
- The issuer must have a class of equity securities listed on the TSX-V.
- The issuer must have filed all continuous disclosure documents that it is required to have filed under applicable securities laws.
- The offering can consist only of the class of equity securities listed on the TSX-V or units consisting of the listed security and a warrant to acquire the listed security.
- The issuer must issue a press release disclosing the proposed offering and provide details of the intended use of proceeds.
- The existing security holder will be required to confirm in writing that he/she was a security holder of the issuer as of the record date for the offering. The record date will be a date prior to the announcement of the offering. The CSA is still considering what would be an appropriate record date.
- The aggregate amount that can be invested by an investor over a 12 month period is limited to $15,000, unless the investor has received suitability advice for the investment from a registered investment dealer. Under the proposed rules, if the investor receives suitably advice there is no limit to the amount that can be invested. However, in their request for comments the CSA have specifically asked if such a limit would be appropriate.
- The investor must be provided with rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record.
- Although an offering document is not required under the proposed exemption, if one is voluntarily provided by the issuer, an investor will have certain rights of action in the event of a misrepresentation in it.
- The proposal includes resale restrictions which would require that any securities issued in reliance on the proposed exemption be subject to a four month restricted period.
- The proposed exemption is only an exemption from the prospectus requirement. There is no corresponding exemption from the dealer registration requirement. Registration will typically not be required if the issuer is not in the business of dealing in or advising with respect to securities.
CSA request for comments
The CSA welcomes comments on all aspects of the proposed prospectus exemption and has requested feedback in respect of nine specific questions. The full text of the Notice, including the questions posed by the CSA and the proposed blanket order and rule, can be found here. The comment period ends on January 20, 2014.