On September 8, 2022, the Canadian Securities Administrators (the “CSA”) announced amendments to National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”) introducing a new prospectus exemption (the “Listed Issuer Financing Exemption”) available to reporting issuers that have equity securities listed on a Canadian stock exchange.
The Listed Issuer Financing Exemption will permit eligible issuers to raise smaller amounts of capital from the public without a requirement to prepare a prospectus. Securities issued under this exemption would be freely tradeable, notwithstanding that the securities would be issued by way of a private placement. This is an important change from most of the commonly used private placement financing exemptions, which result in the issued securities being subject to a four-month hold period.
Issuers using this exemption may, during any 12-month period, raise up to the greater of $5 million or 10% of the issuer’s market capitalization on the date of issuance of the news release announcing the use of the exemption, to a maximum of $10 million. An issuer would be restricted from making distributions of securities under the Listed Issuer Financing Exemption if it would result in more than 50% shareholder dilution in the 12 months prior to the news release.
The Listed Issuer Financing Exemption is subject to a number of conditions including:
- the issuer must have been a reporting issuer in a Canadian jurisdiction for at least 12 months prior to the issuance of a press release announcing the offering under this exemption, and must have filed all timely and continuous disclosure documents required under Canadian securities legislation;
- the issuer is not, or during the 12 months prior to the issuance of a news release announcing the offering under this exemption was not, (i) an issuer whose operations have ceased or (ii) an issuer whose principal asset is cash, cash equivalents, or its exchange listing (i.e. a capital pool company, special purpose acquisition company, a growth acquisition corporation or any similar person or company);
- the issuer is not an investment fund;
- the issuer does not allocate the available funds to a significant acquisition (the tests for which are set out in National Instrument 51-102), a restructuring transaction or any other transaction for which the issuer seeks approval of a securityholder; however, this would not preclude the proceeds from being allocated to acquisitions of a lesser nature that are not captured by the foregoing restrictions;
- at the time of the distribution under the exemption, the issuer reasonably believes that it will have available funds to meet its business objectives and liquidity requirements for a period of 12 months following the distribution;
- the issuer is restricted to offering listed equity securities and units consisting of listed equity securities and warrants convertible into listed equity securities (the Listed Issuer Financing Exemption cannot be used for the distribution of subscription receipts, special warrants, or convertible debentures; however, it could be used by mining issuers to offer “flow-through” common shares as long as the shares are listed equity securities);
- before soliciting an offer to purchase the issuer files on SEDAR a Listed Issuer Financing Document in prescribed Form 45-106F19 and issues and files a new release announcing the offering and alerting readers to the Listed Issuer Financing Document;
- the issuer must close the distribution no later than 45 days after the date the issuer issues and files the news release announcing the offering; and
- 10 days following the distribution of securities under the Listed Issuer Financing Exemption, the issuer must file a report of exempt distribution in Form 45-106F1 Report of Exempt Distribution in every jurisdiction in which a distribution has been made.
The Listed Issuer Financing Document is not subject to review by a securities commission. It requires disclosure regarding details of the offering, a summary description of the issuer’s business and recent developments, the business objectives that the issuer expects to accomplish using the available funds, the funds available to the issuer upon closing of the offering, how proceeds from any other offering in the previous 12 months were actually used, and purchasers’ rights in the event of a misrepresentation. The Listed Issuer Financing Document must also include a certificate, signed by the issuer’s chief executive officer and chief financial officer. No documents are permitted to be incorporated by reference in the Listed Issuer Finance Document and, as guidance, the Canadian Securities Administrators have expressed the view that the Listed Issuer Finance Document should generally not exceed five pages.
The Listed Issuer Financing Exemption provides investors with two options for recourse in the event of a misrepresentation: (i) rights of action under secondary market civil liability; or (ii) a contractual right of rescission against the issuer. The offering document would also be a prescribed “core document” in the issuer's continuous disclosure record and as a result, be subject to statutory secondary market civil liability in the event of a misrepresentation.
An issuer may but is not required to engage a registered dealer to assist in the offering under the Listed Issuer Financing Exemption. Exempt market dealers are permitted to facilitate distributions of freely tradable securities under this exemption. Once the distribution is complete, an exempt market dealer cannot facilitate resale of the securities because this activity would constitute trading in listed securities (an activity in which an exempt market dealer is not able to undertake under applicable securities laws).
Provided all necessary ministerial approvals are obtained, the Listed Issuer Financing Exemption will take effect on November 21, 2022.