When seeking to access capital in the public markets in an uncertain economy, traditional follow-on financing methods might not be the right choice for some issuers. It may be that “bought deal” and “best efforts” public financings are unavailable or otherwise available but on terms that are unsuitable.
In these circumstances, issuers may consider an alternative financing method provided for in Canadian securities legislation: namely, an at-the-market (ATM) public offering. Under an ATM offering, an issuer sells its shares directly into the market through the facilities of a stock exchange or marketplace. In establishing an ATM offering, the issuer sets a maximum number of securities to be issued, and then determines on an ongoing basis how many securities to issue and sell (if any) by setting the specific minimum price, quantity of securities, and sales timing.
This post discusses the framework for ATM offerings and explores some of the advantages and disadvantages associated with this kind of financing.
Base Shelf Prospectus
The first formal step by the issuer in setting up an ATM offering is to file a base shelf prospectus in accordance with National Instrument 44-102 Shelf Distributions (NI 44-102). A base shelf prospectus is a type of short-form prospectus where an issuer normally qualifies the distribution of various types of securities up to a specified maximum dollar amount, which can then be issued over a 25-month period.
While the general rule under securities laws is that all distributions of securities under a prospectus must be made at a fixed price, NI 44-102 provides an exception to this rule for ATM offerings. To give effect to this exception, the shelf prospectus must disclose that the issuer may undertake non-fixed price offering transactions by way of ATM offerings.
Note that NI 44-102 places certain limits on ATM offerings. First, it limits the securities that may be issued by way of an ATM offering to “equity securities”, which are securities that carry a residual right to participate in the earnings of an issuer and, upon liquidation or winding-up of the issuer, in its assets. This typically excludes ATM offerings in respect of preferred shares and debt securities. Second, NI 44-102 limits the market value of equity securities that can be distributed under an ATM offering to 10% of the aggregate market value of the equity securities of that class (for this calculation, securities controlled by persons holding more than 10% of the issuer’s total outstanding equity securities are excluded). Finally, it prohibits an overallotment of securities or any other transaction made with the intention of stabilizing or maintaining the market price of securities.
Once the final base shelf prospectus has been receipted by the applicable securities regulators and all other above steps are complete, the issuer then files a prospectus supplement to the final base shelf prospectus. The prospectus supplement sets out the parameters and terms of the ATM offering and describes the securities that are the subject of such offering. This document generally is not reviewed by the securities regulators and can be quite brief. However, it must set out either the maximum number of shares to be sold or the maximum aggregate offering size, and it must identify the securities dealers that are implementing the ATM offering and specify any commissions to be paid.
Concurrent with the filing of the prospectus supplement for an ATM offering, the issuer typically executes a distribution or sales agency agreement (Distribution Agreement) with the securities dealer selected to act as the issuer’s agent for the ATM offering. Distribution Agreements for ATM offerings contain standard securities dealer protections, including customary covenants, representations and warranties made by the issuer, and customary closing conditions for each placement of securities. Securities dealers are subject to statutory underwriter liability, and so will engage in standard due diligence practices. Because ATM offerings are ongoing affairs, securities dealers will seek comfort letters and legal opinions both as of the time of execution of the Distribution Agreement and on a periodic basis.
Application to List Shares
The issuer must also apply to list shares on the applicable stock exchange(s) up to the maximum number of shares as described in the Distribution Agreement.
Prior to filing a prospectus supplement for an ATM offering, the issuer must apply to applicable provincial securities regulators for exemptive relief in respect of the following:
- Securities laws require each securities dealer effecting a trade of securities to deliver a copy of the applicable prospectus to the purchaser (prospectus delivery requirement). This is not practicable with an ATM offering since the issuer and securities dealer are unlikely to know the identity of the purchaser, given that the securities are sold through a stock exchange.
- Purchasers normally have a right to withdraw from an otherwise binding agreement to purchase securities up until midnight on the second business day after the receipt of a prospectus (right of withdrawal). Similarly, purchasers normally have a right of action for rescission or damages against a securities dealer who does not comply with the prospectus delivery requirement (right of rescission). Because it is not practicable to send the prospectus supplement for an ATM offering to purchasers (as their identity is typically not known), it is not practicable to permit purchasers to enforce such rights.
- Finally, a modification is required to the wording of the prospectus supplement certificate page prescribed by NI 44-102 that the issuer and securities dealer must sign. An exemption is required to permit alternative language to be used that is adapted for the uniqueness of an ATM offering relative to other forms of public securities offerings.
While applications for such exemptive relief are generally granted as a matter of course, such relief orders have historically imposed the following two conditions:
- First, a cap is imposed on the aggregate number of securities that can be sold under an ATM distribution of 25% of the total daily trading volume of the issuer’s securities.
- Second, a requirement is imposed to disclose the number and average selling price of the securities distributed through all Canadian stock exchanges under an ATM offering, as well as the commission and gross and net proceeds for such sales (i) on a monthly basis in respect of such sales in the previous month, and (ii) in annual and interim financial statements in respect of such sales in the related financial period.
Note that despite the granting of exemptions in respect of the right of withdrawal and right of rescission, issuers distributing securities under an ATM offering will remain liable for misrepresentations in the prospectus supplement and accompanying base shelf prospectus pursuant to the civil liability provisions of securities legislation.
Even after a prospectus supplement for an ATM offering has been filed, an issuer is still not required to issue or sell its securities under the ATM offering. Instead, the issuer can, at its discretion, issue a “placement notice” to its securities dealer, which sets out the minimum acceptable price, maximum number of equity securities to be issued and sold, and the timing of the sales. No marketing of the securities is done. The distribution is comparable to a normal brokerage trade, but is initiated by the issuer.
Advantages and Disadvantages
ATM offerings are becoming more popular among Canadian issuers, and it is easy to see why given their many advantages:
- An issuer has the flexibility to determine exactly when it wants to raise capital, and can set the minimum price that it will accept and the total number of shares that it will sell. Further, by selling securities through a stock exchange, it can access public equity markets even if, for whatever reason, traditional forms of equity fundraising are not available or are on terms that are not suitable.
- The overall costs of an ATM Offering are normally lower than those for traditional underwritten or best efforts agency offerings – there is no roadshow, and placement agent fees or commissions are generally lower compared to traditional, fully marketed offerings and bought deals.
- The absence of roadshows frees up the time of management personnel that would otherwise be required to market the issuer’s securities.
- An issuer can to some extent mitigate share price volatility by increasing sales under an ATM offering when the share price is strong, and reducing or suspending sales of securities when the issuer’s share price is weak. Further, such sales are made directly into the market, which limits the overall impact of the distribution on the issuer’s share price, as the issuer need not announce the sale or market the shares.
- An ATM offering does not preclude an issuer from pursuing other financing alternatives, and can be put into place and used while an issuer is seeking a larger, more traditional financing.
On the other hand, ATM offerings have their own distinct disadvantages:
- They are not normally suitable for quickly raising large sums of capital, in particular given the limits on the value of equity securities that can be distributed under an ATM offering.
- Anticipated dilution from ATM programs could place downward pressure on an issuer’s share price.
- Issuers whose shares are particularly illiquid could end up waiting longer to raise the capital they are seeking.
- Because exemptive relief is required prior to commencing an ATM offering, an issuer will have to incur significant upfront costs in obtaining such relief and certain lead time will inevitably be involved. This may discourage an issuer from pursuing an ATM offering if the issuer is uncertain that it will actually distribute its securities thereunder.
- Finally, there are associated maintenance costs for ongoing due diligence to be carried out by the securities dealer, as well as related to ongoing reporting.
On April 6, 2017, the Canadian Securities Administrators (CSA) released CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers (Consultation Paper 51-404). The purpose of Consultation Paper 51-404 is to consider ways to reduce the costs and burdens of regulatory requirements applicable to ongoing reporting and capital raising transactions for reporting issuers in the public markets (other than investment funds). One option under consideration relates to changing the rules applicable to ATM offerings. As the comment period has now ended, it will be interesting to see if the CSA amends securities laws relating to ATM offerings, for example by eliminating the need for upfront exemptive relief prior to commencing an ATM offering.
ATM offerings are not suitable for all issuers, but they are becoming more popular in Canada and play a key role in reducing an issuer’s cost of capital, as well as facilitating public financing when traditional forms of raising capital are either not available or unacceptable.