The securities regulatory authorities (“SRA”) in all Canadian provinces, except Ontario and Newfoundland and Labrador (“Participating Jurisdictions”) announced on March 13, 2014 that they have adopted the new existing security holder prospectus exemption (the “Existing Security Holder Exemption”) Multilateral CSA Notice 45-313. This Existing Security Holder Exemption enables issuers listed (“Listed Issuers”) on the TSX Venture Exchange (“TSX-V”), Toronto Stock Exchange (“TSX”) or the Canadian Securities Exchange (“CSE”) to raise funds by distributing securities to their existing security holders without preparing an offering document.
As noted in our prior bulletin, the Existing Security Holder Exemption will be a tremendous benefit to Listed Issuers, their non-accredited security holders (“Non-Accredited Holders”) and the Canadian capital markets in general. It is anticipated that the Existing Security Holder Exemption will reduce the cost of capital, provide Listed Issuers with greater access to a larger pool of investors and will enable Non-Accredited Holders to access otherwise restricted, and often discounted, private placement offerings.
The Existing Security Holder Exemption
Listed Issuers that have a class of equity securities listed on the TSX-V, TSX or CSE (collectively, an “Eligible Exchange”) and are current on all of their continuous disclosure filing obligations (“Qualified Issuers”) are able to distribute securities to existing security holders provided that:
- the offering consists only of a class of equity securities listed on an Eligible Exchange, or units consisting of a listed security and a warrant to acquire same;
- the Listed Issuer makes the offering available to all existing security holders resident in a Participating Jurisdiction that hold the same type of listed security being offered;
- investors are provided with certain rights of action in the event of a misrepresentation in the Listed Issuer’s continuous disclosure record;
- the Listed Issuer issues a news release disclosing, (i) the offering, (ii) the use of proceeds, (iii) the proposed minimum and maximum number of securities to be distributed, and (iv) how oversubscriptions to the offering will be allocated.
Further, Listed Issuers must represent in the subscription agreement entered into with investors that there are no undisclosed material facts or material changes in respect of the Listed Issuer. Finally, any offering materials provided to an investor in connection with a distribution under the Existing Security Holder Exemption, other than the subscription agreement, must be filed on SEDAR not later than the day the offering material was first provided to an investor.
Investors under the Existing Security Holder Exemption are limited to investing a maximum of $15,000 per Listed Issuer in a 12-month period, unless they obtain suitability advice from a registered investment dealer.
Each investor must confirm in writing to the Listed Issuer that as at the “record date” (being 24 hours prior to the filing of the news release announcing the offering under the Existing Security Holder Exemption) the investor held the type of listed security being acquired under the Existing Security Holder Exemption. It is not immediately clear whether investors will be required to also confirm in writing that the applicable investment limits have been observed, or whether the responsibility for confirming same will rest with Listed Issuers.
Ontario’s Proposed Existing Security Holder Exemption
The Ontario Securities Commission (“OSC”) has not adopted the Existing Security Holder Exemption. However, on March 20, 2014 it published a Notice and Request for Comment introducing four new proposed prospectus exemptions, including an existing security holder prospectus exemption (the “Proposed OSC Exemption”). The comment period for this OSC proposal is open until June 18, 2014.
The Proposed OSC Exemption is substantially the same as the Existing Security Holder Exemption except for the following key differences:
- the issuer must have been a reporting issuer for not less than 12 months, or must become a reporting issuer by filing and obtaining a receipt for a prospectus;
- investment fund issuers cannot rely on the Proposed OSC Exemption;
- issuers must allocate existing security holders a pro rata portion of the offering (subject to identical investment limits as contained in the Existing Security Holder Exemption); and
- any distribution under the Proposed OSC Exemption cannot result in an increase of more than 100% of the outstanding securities of the same class.
Driving Canadian Capital Markets Forward
The authors applaud the efforts of the SRA, and particularly the Alberta Securities Commission and the British Columbia Securities Commission, in actively engaging industry participants in this area and ultimately adopting an exemption that addresses, in part, the challenging Canadian capital market conditions facing Listed Issuers.
The authors believe that with the successful implementation of the Existing Security Holder Exemption, a wider exemption relying on sales through registered investment dealers/advisers is the logical next step towards further opening up the Canadian capital marketplace. This wider exemption would contain similar investor protection measures as in the Existing Security Holder Exemption, without the requirement to be an existing security holder of record.