The Canadian Securities Administrators (CSA) published for a 90 day comment period proposed amendments to National Instrument 45-106 Prospectus Exemptions and CSA Staff Notice (NI 45-106), National Instrument 13-101 System for Electronic Document Analysis and Retrieval (NI 13-101) and National Instrument 45-102 Resale of Securities (NI 45-102) to introduce a new capital raising exemption for reporting issuers that are listed on a Canadian stock exchange (Listed Issuer Financing Exemption).
The Listed Issuer Financing Exemption would allow reporting issuers that have securities listed on a Canadian stock exchange to issue freely tradable listed equity securities to the public using a new offering document (Offering Document) and the issuer’s existing continuous disclosure record on the System for Electronic Document Analysis and Retrieval (SEDAR).
The proposed changes contemplate allowing qualified issuers to raise the greater of $5,000,000 or 10% of the issuer’s market capitalization to a maximum of $10,000,000 or up to 100% dilution during any 12 month period.
Background and Rationale
The CSA is seeking to provide a more efficient method for issuers to access the capital markets that requires less time and costs than a short form prospectus. As a result of the responses to CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, the CSA undertook a research project on potential alternative offering models and analysis of data on all prospectus and private placement offerings conducted in 2017 by issuers listed on Canadian exchanges.
In doing such work, the CSA heard that for smaller offerings (that is, under $10 million), the current prospectus regime can be onerous, the costs associated with preparing a prospectus can be prohibitive, and that dealers have limited interest in smaller offerings. Consequently, issuers are not as inclined to access public markets for smaller offerings. The CSA also heard that the costs of completing a short form prospectus offering are a barrier for issuers who want to raise smaller amounts of capital. Issuers cited underwriter and legal costs as the most significant expenditures. The CSA survey also showed that the costs of a prospectus offering were disproportionate to the amounts raised.
According to the CSA, the proposed Listed Issuer Financing Exemption would benefit smaller issuers more specifically, as it would:
- reduce the cost of accessing public markets;
- allow smaller issuers access to public markets and retail investors;
- provide retail investors with a greater choice of investments available in the primary public;
- provide investors with a greater choice of investments available in the primary public markets;
- result in better and more current disclosure in the market for those smaller issuers that previously only used the private placement system; and
- provide an incentive for all issuers raising smaller amounts of capital to do so by public offerings instead of by private placement.
Qualification Criteria and Procedure to use the Listed Issuer Financing Exemption
Issuers would be able to use the Listed Issuer Financing Exemption if the meet the following criteria:
- the issuer must have equity securities listed on a Canadian stock exchange (or convertible securities that are convertible into equity securities);
- the issuer must have been reporting issuer for at least 12 months prior to the News Release;
- the issuer must have active business operations;
- the issuer must have filed all timely and periodic disclosure documents;
- the securities being distributed are:
a) a listed equity security;
b) a unit consisting of a listed equity security and a warrant; or
c) a security convertible into a listed equity security or a unit consisting of a listed equity security and a warrant;
- before soliciting an offer to purchase from a purchaser, the issuer issues and files a news release (News Release) that announces the offering and states that a purchaser can access the offering document for the distribution under the issuer’s profile on SEDAR+ (the upcoming new filing system to replace SEDAR) and on the issuer’s website;
- files a completed Offering Document on SEDAR+ and the issuer’s website;
- the purchase agreement contains the contractual right of rescission; and
- the distribution is completed within 45 days after the issuance of the News Release.
The exemption would not available if the issuer is planning to use the proceeds for a significant acquisition or restructuring transaction that would otherwise require the issuer to produce additional financial statements.
The Offering Document would not be subject to review or approval by the CSA. The Offering Document would become part of the issuer’s continuous disclosure record for the purposes of secondary market civil liability. In the event of a misrepresentation, purchasers under the Listed Issuer Financing Exemption would have the same rights of action under secondary market civil liability as purchasers on the secondary market. Purchasers will have a contractual right of rescission against the issuer for 180 days following the distribution. The issuer would be required to certify that the Offering Document and the issuer’s continuous disclosure for the past 12 months contains disclosure of all material facts about the issuer or the securities being distributed and does not contain a misrepresentation.
The content of the proposed form of Offering Document would include the following disclosure:
- any new developments in the issuer’s business;
- details on the issuer’s financial condition;
- confirmation that the issuer will have sufficient funds to last 12 months after the offering; and
- details on how the proceeds will be used from the current offering and how proceeds of any previous offerings in the last 12 months have been used.
The Offering Document would be filed with 3 business days after the date of the Offering Document.
If the offering will be conducted in Québec, the Offering Document must be prepared in French, or in English and French.
If a material change occurs after the date of the News Release and before the completion of the distribution, the issuer must cease the distribution until it complies with the material change reporting requirements in National Instrument 51-102 Continuous Disclosure Obligations, files an amended Offering Document and issues and files a news release that states that an amended Offering Document has been filed.
Investments dealers could be involved in offerings using the Listed Issuer Financing Exemption, but there is no requirement for an underwriter to be involved.
Report of Exempt Distribution
The issuer would be required to file a Form 45-106F1 Report of Exempt Distribution within 10 days following the distribution but the issuer would not be required to complete Schedule 1, which provides the purchaser information.
Consequential Amendments to NI 45-102 and NI 13-101
The proposed consequential amendment to NI 45-102 include the addition of the Listed Issuer Financing Exemption to Appendix E Seasoning Period Trades, and no hold period would apply.
The Offering Document would be included in the list of documents required to be filed on SEDAR.
The CSA are welcoming comments on the proposed Listed Issuer Financing Exemption until October 26, 2021. In addition to general comments from market participants, the CSA are seeking input on a series of specific questions listed in the CSA notice. These questions include the following topics;
- the size of financings that should be allowed using the Listed Issuer Financing Exemption;
- the post-reporting filing requirements;
- the filing fees payable;
- the kind of additional securities that could be issued under the proposed exemption and the manner securities are distributed, including the involvement of dealers;
- whether any existing exemptions should be repealed if the Listed Issuer Financing Exemption is adopted; and
- the proposed liability regime applicable.