The Canadian Securities Administrators (the CSA) brings into force new rules (the New Rules) relating to Canada’s prospectus-exempt rights offering regime.  The New Rules, which come into effect on December 8, 2015, are intended to revitalize and streamline the process for rights offerings by reducing the time and costs associated with such offerings.  The New Rules are largely in line with the proposed amendments previously published for comment by the CSA on November 27, 2014.  (See our Osler Update from December 11, 2014 for a summary of the CSA’s original proposal).

A rights offering is an offering by an issuer to its existing security holders, who receive rights entitling them to purchase additional securities, typically at a discounted price. This type of financing requires the issuer to file a prospectus unless it can rely on a prospectus exemption such as the exemptions provided in the New Rules.  The CSA has noted that rights offerings are “one of the fairer ways for issuers to raise capital as they provide existing security holders with an opportunity to protect themselves from dilution” [PDF]. 

Key Changes

The CSA has implemented the New Rules in an effort to encourage more rights offerings in Canada.  Prior to the implementation of the New Rules, the CSA found that the average length of time to complete a prospectus-exempt rights offering was 85 days, with approval from the applicable securities regulators taking on average 40 days. The New Rules eliminate the requirement for securities regulators’ approval, which is anticipated will significantly reduce the time required to complete prospectus-exempt rights offerings.

The New Rules also permit an increase in the number of securities that can be issued by way of a rights offering from 25% to 100% of the issuer’s already outstanding securities in any 12-month period. 

Prospectus-Exempt Rights Offering

The New Rules repeal National Instrument 45-101 – Rights Offering and amend the prospectus exemptions contained in National Instrument 45-106 – Prospectus Exemptions.  The New Rules are available only to reporting issuers (other than investment funds) that have filed all applicable continuous disclosure documents.

Under the New Rules, a prospectus-exempt rights offering features the following process and requirements:

  • Notice and Circular – An issuer is required to file and send to security holders a notice prepared in accordance with Form 45-106F14 (the Rights Offering Notice) which would provide basic disclosure of the offering in Q&A format.  Concurrent with providing the Rights Offering Notice, the issuer is required to prepare and file on SEDAR a simplified rights offering circular (the Circular) in accordance with Form 45-106F15.  Issuers are not required to deliver their Circular to security holders – it is sufficient for the Rights Offering Notice to indicate that the Circular may be accessed on SEDAR.
  • Pre-Announcement Requirements – In accordance with the TSX Company Manual (the Company Manual), an issuer is required to provide a draft of the Rights Offering Notice and the Circular to the TSX for comment.  The proposed offering must also receive TSX approval before the offering proceeds.  The TSX is currently considering amendments to the Company Manual to address the New Rules.
  • Timeline – Following the mailing of the Rights Offering Notice, security holders must be provided with at least 21 and not more than 90 days to exercise their rights.
  • Pricing – The subscription price of a security issuable on exercise of a right must be lower than: (i) for publicly traded securities, the market price of the security on the day the Rights Offering Notice is filed; and (ii) for non-publicly traded securities, the fair value of the security on the day the Rights Offering Notice is filed, subject to certain exceptions. This is basically unchanged from prior requirements.
  • Dilution Limit – The dilution limit under the New Rules is 100% during any 12 month period (up from 25%), assuming the exercise of all rights issued by the issuer under the New Rules.
  • Offering Format – A rights offering begins with the basic subscription privilege (the Basic Privilege) being made available on a pro rata basis to all security holders of the class of securities being distributed upon the exercise of the rights.  To potentially increase the size of the offering, the issuer may also grant additional subscription privileges (the Additional Privilege) which allows holders of rights to subscribe to securities not taken up under the Basic Privilege.  The Additional Privilege is limited to each security holder’s pro rata participation in the Basic Privilege.  Provided the issuer has granted security holders the Additional Privilege, the issuer may also enter into a stand-by commitment (the Stand-by Commitment) with a guarantor of sufficient financial ability, whereby the guarantor agrees to purchase some or all of the securities offered in the rights offering that are not subscribed for by security holders.  
  • Stand-by Guarantor Exemption – The New Rules include a separate prospectus exemption for securities issued to a stand-by guarantor regardless of whether the stand-by guarantor was a security holder prior to the rights offering.  Securities issued to a stand-by guarantor under the New Rules will generally be freely tradeable, provided the stand-by guarantor is acquiring the securities as principal.
  • Closing News Release – Issuers are required to file a closing news release containing prescribed information relating to the rights offering including the number of securities distributed under the Basic Privilege, Additional Privilege and Stand-by Commitment, as applicable.
  • Statutory Second Market Civil Liability – The New Rules extend statutory liability for secondary market disclosure to the acquisition of securities under a rights offering.  Accordingly, investors in a rights offering will have a statutory right of action against the issuer and also against the directors of the issuer, in their personal capacity, for damages resulting from a misrepresentation in the rights offering circular or any other continuous disclosure document.
  • Minimal Connection to Canada – The New Rules contain a prospectus exemption for issuers conducting a rights offering that have a minimal connection to Canada.  Both, reporting issuers and non-reporting issuers are permitted to use this exemption provided that:  (i) the number of beneficial security holders of the class of securities for which the rights are issued that are resident in Canada do not constitute 10% or more of the holders of that class; and (ii) the number of securities beneficially held by security holders of the class of securities for which the rights are issued that are resident in Canada do not constitute 10% or more of the securities of that class.