On November 21, 2013, the securities regulators in each jurisdiction of Canada other than Ontario and Newfoundland (the “ParticipatingRegulators”) published Multilateral CSA Notice 45-312 for comment. The notice contemplates a new capital raising prospectus exemption (the “Proposed Exemption”) for issuers listed on the TSX Venture Exchange (the “TSXV”).
The core concept of the new exemption is that an investor who holds (as of a specific record date) a security of an issuer that is listed on the TSXV (the “Listed Security”), however acquired, may subscribe for additional securities of same type or units (with each unit comprised of the Listed Security and a warrant to acquire the Listed Security) without the need for the issuer to prepare a prospectus or other offering document.
The Proposed Exemption marks an additional attempt by securities regulatory authorities to open up the financing avenues available to issuers, in particular smaller issuers, while still aiming to provide a sufficient degree of protection for ordinary investors.
The Proposed Exemption applies only to the prospectus requirement. Issuers may still be required to involve a dealer in a transaction pursuant to the Proposed Exemption to address the registration requirement.
Reasons for the Proposed Exemption
The Participating Regulators are of the view, based on research, that after their initial public offering most venture issuers avoid preparing a prospectus for fear of incurring the associated costs without any guarantee that the offering will be successful or will close at all. This could result in significant time and expense being incurred with no return for the issuer.
While venture issuers are able to rely on other prospectus exemptions, the Participating Regulators have found that the main exemption being relied on is the accredited investor exemption. The use of this exemption limits financings to a small group of potential investors. The other main available exemptions, being the offering memorandum exemption, rights offering exemption, and TSXV short form offering document, are being used rarely. Accordingly, ordinary retail investors are denied the opportunity to invest in companies on the discounted private placement market, and instead are restricted to open market purchases. The Participating Regulators believe that venture issuers should have access to such investors for capital raising purposes.
In addition, the Participating Regulators are of the view that an investor who has previously acquired Listed Securities has already taken the time to make an investment decision about the issuer. This means the investor most likely is familiar with the issuer and its continuous disclosure, and has some investment experience. Accordingly, such an investor requires less regulatory protection than an investor that has had little to no exposure to the issuer.
Conditions for Use of the Proposed Exemption
The conditions to Proposed Exemption include:
- The issuer must have a class of equity securities listed on the TSXV;
- The issuer must have filed all timely and periodic disclosure requirements as required under applicable securities laws;
- The offering can only consist of the Listed Securities or units comprised of Listed Securities and warrants to acquire Listed Securities;
- The issuer must issue a news release disclosing the proposed offering, including details of the use of proceeds, and the number and pricing of the securities to be issued (including minimum and maximum amounts, if applicable);
- The investor must confirm in writing that as of the “record date” the investor held the Listed Security;
- If the investor has not received advice as to the suitability of the investment from a registered dealer, the investor must not invest more than $15,000 in the aggregate in securities of the issuer using the Proposed Exemption in any 12 months;
- The issuer must provide the investor with rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record;
- If the issuer voluntarily provides an offering document in connection with the offering, the issuer must provide the investor with rights of action in the event of a misrepresentation in the offering document;
- The purchase price has to be paid in cash at the time of distribution; and
- The subscription agreement for the offering must contain a certificate of the issuer that declares that the issuer’s continuous disclosure does not contain a misrepresentation, and must certify that there are no material changes or material facts related to the issuer that have not been generally disclosed.
Any securities issued pursuant to the Proposed Exemption would be subject to a 4-month hold period, and the issuer would be required to file a report of exempt distribution within 10 days of completion of the offering.
Concept of “Record Date” Undetermined
The Participating Regulators have not yet settled on the timing for when the investor must have held the Listed Security in order to be able to rely on the Proposed Exemption. They are currently contemplating two possibilities – either the day immediately prior to the distribution of the news release announcing the related offering, or a requirement that the investor has held the securities for a longer period prior to the announcement (such as at least 30 days).
The concern with the shorter time period is that it could easily make the Proposed Exemption available to any potential investor, as the investor could make a purchase of a single share on the open market the day before the announcement and then be able to subscribe in the private placement without the benefit of the protection offered by a prospectus. The Participating Regulators are concerned this could result in unsophisticated investors being pressured into taking these steps without due consideration of the investment opportunity.
Implementation and Time Periods
Currently, the securities regulatory authorities in Alberta, Quebec and New Brunswick are intending to adopt the Proposed Exemption as a rule, on a permanent basis. For each of the other Participating Regulators, they intend to adopt the Proposed Exemption as a blanket order that would expire on December 31, 2015. The Participating Regulators do leave open the possibility of renewing the Proposed Exemptionor adopting it as a permanent rule after that time, after conducting an analysis on the actual use and effects of the Proposed Exemption.
The conditions regarding contractual rights of action are included in the Proposed Exemption because the statutory rights of action will not apply in certain of the jurisdictions that are adopting the Proposed Exemption as a blanket order.
The Proposed Exemption is only in draft form, and the Participating Regulators are seeking comment from interested parties. The comment period is open until January 20, 2014. The Participating Regulators have also included several questions regarding the Proposed Exemption in the notice, which is available here.
We expect that the Proposed Exemption will receive broad support and, if implemented, there will be demand for it to be expanded to the remaining Canadian jurisdictions and made available to issuers generally.
We would be pleased to assist you in formulating and providing your comments to the Participating Regulators on the Proposed Exemption.
If you would like more information about the Proposed Exemption, please contact the authors or your usual contact in Borden Ladner Gervais’ Securities & Capital Markets Group.