The use of prospectus-exempt rights offerings has increased across Canada since the adoption of the new rights offering exemption in 2015, as reported in a Staff Notice published by the Canadian Securities Administrators (CSA) on April 20, 2017. The Staff Notice highlights a number of areas where compliance and disclosure related to rights offerings can be improved and provides guidance for reporting issuers relying on the exemption.
Areas for Improvement
Since its adoption, the CSA has monitored the use of the rights offering exemption and has found three areas where compliance and disclosure could be improved:
- Stand-by Commitments. The CSA found that there was weakness is disclosure regarding the nature of the relationship between the stand-by guarantor and the issuer. In particular, the CSA notes that prior disclosure of any relationship between the issuer and the guarantor is insufficient as Form 45-106F15 Rights Offering Circular for Reporting Issuers specifically requires that the issuer disclose the relationship between the stand-by guarantor and the issuer, including whether, and, if applicable, the basis on which the stand-by guarantor is a related party of the issuer.
- Use of Available Funds. In conducting a prospectus-exempt rights offering, issuers are required to disclose the funds available after the rights offering and how the issuer will use such funds. The CSA found that most issuers provided sufficient disclosure in this regard; however, deficiencies were found related to disclosure of working capital deficiency, liquidity issues, and use of funds. Issuers with negative cash flow from operating activities are expected to provide a breakdown of their key expenses for at least the next 12 months.
- Closing Press Release. Issuers are required to file a closing news release that includes certain prescribed information. The CSA found instances where the prescribed information was not all included and remind issuers of a specific SEDAR document type under which closing news release should be filed.
According to the Staff Notice, between its adoption in December 2015 and December 31, 2016, 30 issuers had used the rights offering prospectus exemption to raise $247.6 million. This marks a significant increase in use of rights offerings when compared to prior years where there were approximately 13 prospectus-exempt rights offerings completed by Canadian reporting issuers each year. Half of the offerings were undertaken by issuers in the mining and oil and gas industries, with another 9 offerings in the biotechnology/pharmaceutical and technology spaces. Of the 30 offerings that took place in 2016, the majority were undertaken by venture issuers (23 out of 30) and more than half of the funds raised was in Ontario and British Columbia.
One notable benefit to the use of the new rights offering exemption is the shortened time to closing. Prior to the adoption of the exemption in 2015, the CSA reviewed 93 prospectus-exempt offerings over a seven-year time period and found that the average length of time to complete an offering was 85 days. This has been significantly shortened under the new rights offering exemption with the average number of days from filing of the rights offering notice to closing being just under 38 days.