On November 21, 2013, Canadian securities regulators in all jurisdictions except Ontario and Newfoundland published for comment CSA Notice 45-312, which outlines a draft prospectus exemption for distributions to existing security holders (the Proposed Exemption). The Proposed Exemption would provide issuers listed on the TSX Venture Exchange (TSXV) the ability to distribute securities to their existing security holders without a prospectus or disclosure document in certain circumstances.
Under current Canadian securities legislation, issuers can only distribute securities through a prospectus, unless there is an exemption from the prospectus requirement available to the issuer under National Instrument 45-106 Prospectus and Registration Exemptions. The accredited investor exemption under National Instrument 45-106 is one of the exemptions most often relied upon by issuers. Retail investors who do not qualify as accredited investors are often limited to purchasing securities through a prospectus.
The Proposed Exemption
Under the Proposed Exemption, TSXV issuers would be permitted to distribute securities to existing security holders, relying on their continuous disclosure obligations under securities legislation and as supplemented by the TSXV Corporate Finance Manual. As long as certain conditions are met, these issuers would not be required to prepare an additional offering document. These conditions are as follows:
- the issuer has a class of securities listed on the TSXV;
- the issuer has filed all required timely and periodic disclosure documents;
- the offering consists only of the class of securities listed on the TSXV or units consisting of the listed security and a warrant to acquire the listed security;
- the issuer issues a news release disclosing the proposed offering, including details of the use of the proceeds;
- each investor confirms in writing to the issuer that, as at the record date, it held the type of listed security that the investor is acquiring under the proposed exemption;
- the aggregate amount invested by an investor over a 12 month period is limited to $15,000 unless the investor obtains suitability advice from a registered investment dealer;
- the investor is provided with certain rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record; and
- where the issuer voluntarily provides an offering document, the investor will have certain rights of action in the event of a misrepresentation.
The first trade of securities issued under the Proposed Exemption would be subject to resale restrictions under section 2.5 of National Instrument 45-102 Resale of Securities like most other capital raising prospectus exemptions. In addition, issuers will have to file a report of exempt distribution within 10 days after each distribution under the Proposed Exemption.
The Proposed Exemption would benefit junior venture issuers, allowing them to raise additional capital by accessing a segment of the capital market that would be unavailable in the absence of this exemption due to the cost of preparing a disclosure document. Retail investors who are currently limited to purchasing additional securities on the secondary market would also benefit from the Proposed Exemption.
Impact in Ontario
In the December 5, 2013 Ontario Securities Commission (OSC) Bulletin, the OSC states that it supports the Proposed Exemption and will consider the comments on that proposal in developing its proposed existing security holder exemption, with the goal of substantial harmonization. As part of the OSC’s review, it will consider whether the Proposed Exemption should be available to issuers listed on other exchanges.
The comment period for the proposed exemption closes on January 20, 2014. The CSA has set out nine specific questions for which feedback is requested. The OSC asks commenters to share their comments on the Proposed Exemption by submitting them to the OSC.