On January 12, 2017, the Canadian Securities Administrators (CSA) published Multilateral CSA Staff Notice 45-322 Potential Concerns with the Structure of Rights Offerings. The notice, issued on behalf of the securities regulators in Ontario, Quebec, Saskatchewan, Manitoba and Alberta, is a warning to issuers who may be perceived as taking improper advantage of the rights offering prospectus exemption available under section 2.1 of National Instrument 45-106 Prospectus Exemptions.
The exemption’s purpose is to enable reporting issuers to raise capital while facilitating fully informed, voluntary participation by existing securityholders based on their proportionate interest. An issuer may be perceived as misusing the exemption in circumstances where an offering is structured to disincentivize existing securityholders from participating in the offering, or where stand-by commitments of guarantors are not reasonably assured, such as where a stand-by commitment is conditional upon minimal participation by existing securityholders. These situations may prevent existing securityholders from making free and informed decisions about participating in the offering, which is contrary to the public interest in the eyes of securities regulators.
To mitigate these concerns with the knowledge that prior regulatory review is not currently required under the rights offering regime, the CSA indicated that staff may choose to review a rights offering if it appears to be conducted in a fashion that is contrary to the public interest. Staff may even recommend to cease trade an offering where they believe an issuer is acting in a manner that is contrary to the goals of the offering regime and investor protection. Accordingly, issuers should be wary of the effect of the structure of an offering on existing securityholder participation.