A revamped rights offering regime for reporting issuers will come into effect on December 8, 2015 (the Amendments).
Under the current regime, rights offerings are widely viewed by reporting issuers as a financing method of last resort due to the length and unpredictability of the offering timeline and the sorely outdated capital raising limits. The Amendments significantly address the issues that made rights offerings impractical and unpalatable and will also align Canada's rights offering regime more closely with other capital markets around the world, where rights offerings are considered a financing method of first resort.
A rights offering is a method of financing that gives a reporting issuer's existing securityholders the right to acquire additional securities of the issuer on a proportional basis, typically at a significant discount to the market price. Considered an inherently equitable method for an issuer to raise capital, rights offerings are common in many jurisdictions. The existing rights offering regime in Canada, however, is costly and sluggish and rights offerings are virtually extinct in the Canadian capital markets as a result.
In Canada, rights offerings are often seen as a financing method of last resort by issuers because of the associated time, cost and risk. According to the Canadian Securities Administrators, under the current regime, it takes an average of 85 days to complete a rights offering — including an average of 40 days to obtain approval of the circular from the regulators. The overall time period to complete a prospectus-exempt rights offering is considerably longer than the time period to complete an offering using other prospectus exemptions or, in some cases, an offering by prospectus. The current exemption also restricts issuers from issuing more than 25% of their securities under the exemption in any 12-month period. This dilution limit is seen as being too low, restricting the ability of issuers with small market capitalizations from raising enough money under the exemption to make a rights offering worthwhile.
The Amendments take significant strides towards making rights offerings more attractive to issuers by simplifying the documentation and streamlining the process for completing a rights offering and easing limitations on dilution. The Amendments will repeal National Instrument 45-101 — Rights Offerings and be included as an amended section 2.1 of National Instrument 45-106 — Prospectus Exemptions. The Amendments are not applicable to investment funds.
Simplified Documentation. The Amendments adopt a new form of rights offering circular, which presents information to shareholders in a question-and-answer format, covering how the proceeds of the offering will be used by the issuer, what the characteristics of the rights offered are and what the potential dilution is for existing securityholders that do not exercise their rights. The new format is intended to make the offering circular more accessible and user-friendly for securityholders, in addition to reducing the time and cost associated with preparing an offering circular.
Issuers will no longer be required to send the offering circular to securityholders. Instead, a rights offering notice is prepared and provided to securityholders. The rights offering notice, which is also presented in question-and-answer format, is required to be less than two pages in length and contains basic information in respect of the rights offering, such as where securityholders can access the rights offering circular online and when and how securityholders can exercise their rights.
On the closing of the rights offering, a news release must be issued and filed by the issuer. The news release must contain certain prescribed information relating to the rights offering, including the aggregate gross proceeds raised, the number of securities distributed under the basic subscription privilege, the additional subscription privilege and under any stand-by commitment, as well as the total number of the securities of the class issued and outstanding as of the closing date.
Streamlined Offering Process. Under the Amendments, a rights offering is commenced when the rights offering notice is filed on SEDAR and delivered to all existing Canadian-resident securityholders of the class of securities being offered under the rights offering. The rights offering circular is filed on SEDAR concurrently with the rights offering notice, but this document no longer has to be delivered to securityholders, which will translate into savings for reporting issuers on printing and mailing costs. The rights offering circular is also no longer vetted by securities regulators, which will address the time delay typically associated with rights offerings under the current regime.
Exercise Period. Securityholders must be provided with at least 21 days and not more than 90 days to exercise their rights under the rights offering.
Increased Dilution Limit. The Amendments increase the dilution limit under the existing rights offering regime from 25% to 100%. This increase is an important change, since the existing 25% dilution limit effectively handicaps issuers by limiting their ability to raise enough money under the exemption to make a rights offering worthwhile. Rights offerings that result in greater dilution will have to be undertaken by way of a prospectus.
Discounted Pricing. The Amendments require that the subscription price for rights offerings must be priced below the market price at the time the rights offering notice is filed, which should encourage greater participation from retail shareholders. For non-listed reporting issuers, the subscription price must be less than the fair market value of the securities at the time the rights offering notice is filed.
Additional Subscription Privileges. A rights offering must provide a basic subscription privilege, on a proportional basis, to all securityholders resident in Canada. An additional subscription privilege may also be made available, which would give securityholders the right to subscribe for securities not taken up by other securityholders under the basic subscription privilege. The additional subscription privilege is limited to each securityholder's proportional entitlement under the basic subscription privilege.
Stand-by Commitment. The Amendments allow for a stand-by commitment, which would permit the reporting issuer to arrange for a stand-by guarantor to acquire the securities not subscribed for under the basic and additional subscription privileges. Securities acquired by the stand-by guarantor are subject to a new prospectus exemption and will not be subject to a four month hold period.
Statutory Liability. Under the Amendments, secondary market liability will apply to rights offerings, providing investors with a statutory right of action for damages resulting from a misrepresentation in the reporting issuer's rights offering circular or other continuous disclosure documents, which will help ensure that the new regime doesn't impair investor protection.