“At-The-Market”, or ATM, offerings are likely to continue gaining traction in Canada following the publication of a notice of amendments (the Amendments) to National Instrument 44-102 Shelf Distributions (NI 44-102) by the Canadian Securities Administrators (CSA). The key features of the Amendments are as follows:
- The Amendments will come into force on August 31, 2020 (subject to ministerial approvals).
- Canadian ATM offering procedures will be streamlined, resulting in time and cost efficiencies.
- The Amendments should make Canadian ATM offerings more attractive to cross-listed issuers.
- ATM offerings may provide access to capital in constrained or otherwise difficult market conditions.
- ATM offerings allow for rapid access to capital to take advantage of temporary favourable market conditions.
An ATM is a form of offering whereby an issuer engages a designated investment bank (the agent) to sell the issuer’s shares directly into the market through the stock exchange on which the issuer is listed. In most cases, neither the issuer nor the agent knows the identity of the actual purchaser. Ultimately, the use of an ATM offering can optimize an issuer’s capital management strategy by providing rapid market access at favourable times which often are temporary in nature.
Prior to the Amendments, an issuer had to apply to the Canadian securities regulators before launching an ATM offering for exemptive relief from certain Canadian securities law requirements, including the prospectus delivery requirement, rights of withdrawal/rights of rescission, and the form of prospectus supplement certificate page (the ATM exemptions). The traditional exemptive relief orders (the Traditional Orders) often take several weeks and additional expense to obtain.
While the Amendments have codified the ATM exemptions, certain conditions that have been historically applied to ATM offerings by the Traditional Orders have been relaxed in or eliminated by the Amendments. We believe the Amendments will make ATMs more attractive as a corporate finance option for Canadian issuers.
Conducting an ATM offering under the Amendments
ATM Offering Size
The Amendments remove the limit on the aggregate permitted size of an ATM offering. Prior to the Amendments, NI 44-102 limited the number of shares that the Issuer could issue and sell under an ATM offering to 10% of the issuer’s market capitalization.
Daily Sales Volume
The Traditional Orders had required the aggregate number of shares sold on all Canadian marketplaces under an ATM offering to not exceed 25% of the trading volume on all Canadian marketplaces on each trading day.
As a result of the Amendments, there will no longer be any limit on the daily permitted sales volume under an ATM offering. The amended companion policy to NI 44-102 notes, however, that the issuer will have an interest in minimizing the market impact of an ATM offering and that the agent is prohibited from engaging in conduct that may disrupt a fair and orderly market under IIROC rules and standards of conduct. Accordingly, while there may not be an explicit cap on the daily sales volume, there may be a practical cap depending on the liquidity of the issuer’s listed shares.
Base Shelf Prospectus
In order to implement an ATM offering, an issuer must file a short form base shelf prospectus (base shelf prospectus) which provides the issuer with the ability to undertake an ATM offering. Among other things, the cover page of the base shelf prospectus will need to state that it may qualify an ATM offering.
Issuers should note that a base shelf prospectus that can qualify an ATM offering (ATM prospectus) may result in a more burdensome review process as compared against a regular base shelf prospectus.
If an ATM prospectus has been filed and receipted, the issuer can look to file a prospectus supplement establishing the parameters for its ATM offering. Once the prospectus supplement is filed, the issuer can then sell its shares under the ATM offering for up to 25 months (the actual time will depend on when the issuer’s ATM prospectus expires). The issuer will then have broad discretion as to if, when and how it will conduct an ATM offering, including deciding on the timing of any sales of shares through the market, the number of shares to be sold at any given time and the minimum price at which the issuer is willing to sell shares.
As ATM offerings are made directly on a securities exchange, issuers and dealers are unable to determine where a purchaser is located at the time of the trade. As a result, it is possible that a purchaser under an ATM offering can be located in any jurisdiction of Canada. Accordingly, issuers have traditionally filed their ATM prospectus in each Canadian jurisdiction or, at the very least, in each Canadian province (excluding the territories).
Issuers should note, however, that French translation requirements apply to any distribution of securities in the Province of Québec. If an issuer has not distributed securities in Québec or is otherwise exempt from French translation requirements, that issuer should consider applying for exemptive relief from the French translation requirements from the Autorité des marchés financiers. Exemptive relief from French translation requirements will be important for issuers to avoid the time and expense of French translation of their ATM prospectus, prospectus supplements and continuous disclosure documents incorporated by reference in the ATM prospectus, in particular given that these documents are ultimately not delivered to purchasers of shares under an ATM offering.
During an ATM offering, Canadian securities law requires that issuers ensure that the ATM prospectus contains full, true and plain disclosure of all material facts relating to the issuer and its shares. This precludes the issuer from making sales under the ATM offering at any time that it is in blackout or otherwise in possession of undisclosed information that would constitute a material fact or a material change under Canadian securities laws. As continuous disclosure documents are prepared, filed and therefore incorporated by reference into the ATM prospectus (such as financial statements, management’s discussion and analysis (MD&A), annual information forms, information circulars and material change reports), the agent conducts ongoing due diligence on the issuer.
The Amendments also codify the concept of a “designated news release” for the purposes of the ATM prospectus. This designation was set out in the Traditional Orders, and the ATM prospectus will provide that any designated news release will be deemed to be incorporated by reference into the ATM prospectus in order to ensure that it contains full, true and plain disclosure of all material facts relating to the issuer and its shares without requiring an amendment to the ATM prospectus or the filing of a material change report. Therefore, in addition to the typical continuous disclosure documents incorporated by reference in a base shelf prospectus, the agent will also conduct due diligence on the subject matter of each designated news release.
If the issuer is an investment fund, the ATM prospectus must include a statement that the at-the-market distribution will be conducted such that the issue price of its securities sold under the ATM offering will not, as far as reasonably practicable, be a price that causes dilution of the net asset value of other outstanding securities of the investment fund at the time the security is issued.
The Amendments require that issuers file a quarterly notice of proceeds in respect of an ATM offering. The report, which can be included in the issuer’s interim and annual financial statements and MD&A, must disclose the number and average price of shares distributed, gross proceeds, commissions and net proceeds. The Traditional Orders had required certain issuers to make these reports within seven calendar days after the end of any calendar month (in addition to quarterly reports in its financial statements and MD&A).
The Amendments should be of particular interest to issuers that cannot rely on traditional equity offerings, particularly during the prevailing economic and market conditions that resulted from the emergence of the COVID-19 pandemic in early 2020. While ATM offerings have not been historically utilized in Canada to the extent seen in the United States, the inclusion of an ATM offering as part of an issuer’s capital markets strategy should be increasingly common in Canada. Fasken has a depth of experience with this financing structure and is pleased that the CSA has taken steps to streamline the ATM offering procedures.