On June 4, 2019, the US Securities and Exchange Commission (SEC) sued Kik Interactive Inc. (Kik), a privately-held Canadian corporation based in Waterloo, Ontario, for conducting an unregistered securities offering of its digital token “Kin” in violation of section 5 of the Securities Act of 1933. The SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against Kik.
As of June 13, 2019, the Canada Business Corporations Act (the “CBCA”) requires that each federal private corporation (a “Corporation”) implements and maintains a register (the “Register”) listing all individuals with significant control over the Corporation (the “Individuals with Significant Control”). The register must be kept at the corporation’s registered office or another place in…
On April 8, 2019, the federal government introduced Bill C-97 to implement measures from its spring budget. The bill proposes amendments to many federal statutes, including several important amendments to the Canada Business Corporations Act (CBCA) relevant to both private and public companies. Our summary of the proposed changes is set out below, some of which deal with familiar issues, while others would introduce new requirements for companies.
When seeking to access capital in the public markets in an uncertain economy, traditional follow-on financing methods might not be the right choice for some issuers. It may be that “bought deal” and “best efforts” public financings are unavailable or otherwise available but on terms that are unsuitable.
In these circumstances, issuers may consider an alternative financing method provided for in Canadian securities legislation: namely, an at-the-market (ATM) public offering. Under an ATM offering, an issuer sells its shares directly into the market through the facilities of a stock exchange or marketplace. In establishing an ATM offering, the issuer sets a maximum number of securities to be issued, and then determines on an ongoing basis how many securities to issue and sell (if any) by setting the specific minimum price, quantity of securities, and sales timing.
This post discusses the framework for ATM offerings and explores some of the advantages and disadvantages associated with this kind of financing.
Base Shelf Prospectus
The first formal step by the issuer in setting up an ATM offering is to file a base shelf prospectus in accordance with National Instrument 44-102 Shelf Distributions (NI 44-102). A base shelf prospectus is a type of short-form prospectus where an issuer normally qualifies the distribution of various types of securities up to a specified maximum dollar amount, which can then be issued over a 25-month period.
While the general rule under securities laws is that all distributions of securities under a prospectus must be made at a fixed price, NI 44-102 provides an exception to this rule for ATM offerings. To give effect to this exception, the shelf prospectus must disclose that the issuer may undertake non-fixed price offering transactions by way of ATM offerings.
Note that NI 44-102 places certain limits on ATM offerings. First, it limits the securities that may be issued by way of an ATM offering to “equity securities”, which are securities that carry a residual right to participate in the earnings of an issuer and, upon liquidation or winding-up of the issuer, in its assets. This typically excludes ATM offerings in respect of preferred shares and debt securities. Second, NI 44-102 limits the market value of equity securities that can be distributed under an ATM offering to 10% of the aggregate market value of the equity securities of that class (for this calculation, securities controlled by persons holding more than 10% of the issuer’s total outstanding equity securities are excluded). Finally, it prohibits an overallotment of securities or any other transaction made with the intention of stabilizing or maintaining the market price of securities.
Once the final base shelf prospectus has been receipted by the applicable securities regulators and all other above steps are complete, the issuer then files a prospectus supplement to the final base shelf prospectus. The prospectus supplement sets out the parameters and terms of the ATM offering and describes the securities that are the subject of such offering. This document generally is not reviewed by the securities regulators and can be quite brief. However, it must set out either the maximum number of shares to be sold or the maximum aggregate offering size, and it must identify the securities dealers that are implementing the ATM offering and specify any commissions to be paid.
Concurrent with the filing of the prospectus supplement for an ATM offering, the issuer typically executes a distribution or sales agency agreement (Distribution Agreement) with the securities dealer selected to act as the issuer’s agent for the ATM offering. Distribution Agreements for ATM offerings contain standard securities dealer protections, including customary covenants, representations and warranties made by the issuer, and customary closing conditions for each placement of securities. Securities dealers are subject to statutory underwriter liability, and so will engage in standard due diligence practices. Because ATM offerings are ongoing affairs, securities dealers will seek comfort letters and legal opinions both as of the time of execution of the Distribution Agreement and on a periodic basis.
On December 1, 2016, the Alberta Securities Commission (ASC) will be replacing the current fee rule in Alberta with ASC Rule 13-501 Fees (ASC Rule 13-501) which will increase registrant and capital market activity fees, and for the first time in Alberta, will introduce a participation fee model.
Any issuers that are currently a reporting issuer in Ontario are already familiar with the concept of a participation fee. The participation fee is an annual payment based on the capitalization of the issuer (the larger the issuer’s capitalization is, the larger the fee is). The ASC participation fee will be payable at the time that the issuer files its annual financial statements on SEDAR. Under the ASC’s current fee rule, the maximum an issuer would pay when it file its annual financial statements is $2,400 (which is the amount paid by short form eligible issuers).
As a result of the introduction of the new participation fee model, any reporting issuer with a capitalization of over $50 million will see an increase in the payment that it submits to Alberta with its annual financial statements. In some cases, issuers will see a significant increase as the maximum amount payable under the participation fee model is $48,000.
Types of Reporting Issuers
The ASC participation fee rates are based on the type of reporting issuer it is – either a Class 1 reporting issuer, a Class 2 reporting issuer, a Class 3A reporting issuer or a Class 3B reporting issuer. Each type of reporting issuer is defined below:
On April 7, 2016, the Canadian Securities Administrators (CSA) published amendments (Amendments) to the reporting requirements in National Instrument 45-106 Prospectus Exemptions (NI 45-106). The amendments were previously published for public comment on August 13, 2015. Concurrently, the CSA published CSA Staff Notice 45-308 (Revised) Guidance for Preparing and Filing Reports of Exempt Distribution under 45-106 (CSA Notice 45-308) which provides helpful information for industry participants in navigating through the Amendments which come into force on June 30, 2016.
Current Reporting Forms
The reporting forms required to report an exempt distribution presently consist of two forms, being Form 45-106F6 British Columbia Report of Exempt Distribution (Form 45-106F6) which is used for distributions in British Columbia and Form 45-106F1 Report of Exempt Distribution (Form 45-106F1) which is used for distributions in all other Canadian jurisdictions. Issuers who meet an exemption under BC Instrument 45-533 may file a Form 45-106F1 in British Columbia instead of filing a Form 45-106F6.
As described below, the amendments replace Form 45-106F1 and Form 45-106F6 with a single, new Form 45-106F1 (New Form 45-106F1).
Current Filing Systems
Form 45-106F1 or Form 45-106F6, as applicable, are filed with the British Columbia Securities Commission (BCSC) through the BCSC eServices website and issuers are required to have a profile created on the BCSC eServices system before a filing can be completed. Issuers who have a System for Electronic Document Analysis and Retrieval (SEDAR) profile automatically have a profile existing in BCSC eServices. Issuers who do not have a SEDAR profile are required to submit a profile form to the BCSC to create their profile on BCSC eServices at least 24 hours before they can submit the reporting form. BCSC eServices requires the filer to enter a few pieces of information from the Form 45-106F1/F6 into certain fields on the eServices submission page before attaching the reporting documents and completing the submission. The Form 45-106F1 or Form 45-106F6 is typically populated in Word format, and then converted into PDF format before being uploaded to BCSC eServices. In addition, the schedules to Form 45-106F1 and Form 45-106F6 are removed and filed as separate PDF documents.
Form 45-106F1 filings with the Ontario Securities Commission (OSC) are filed through the OSC’s Electronic Filing Portal (OSC Portal). Unlike the BCSC eServices system, the OSC Portal does not require a profile to be created by an issuer in order to make a filing. Also unlike the BCSC eServices system, where only a few pieces of information need to be entered into the submission page, the submission on the OSC Portal requires the filer to enter every piece of information in the entire Form 45-106F1 onto the submission page. In addition, Schedule I to Form 45-106F1 must be completed in Excel format and uploaded to the submission page. The Form 45-106F1 is typically originally populated in Word format, the Schedule I information is populated a second time in Excel format, and the filer populates the Form 45-106F1 in its entirety again electronically on the OSC Portal. If the Form 45-106F1 is being filed only in Ontario, a filer may draft the Form 45-106F1 in the OSC Portal and the Excel version of Schedule I and forgo the creation of the Word version.
Currently, Form 45-106F1 filings in all other Canadian jurisdictions simply require the executed Form 45-106F1 to be mailed to the securities commission. On May 24, 2016 the CSA will require the filing of Form 45-106F1 through SEDAR, subject to an exemption for foreign issuers outlined below.
Investment Fund Filing Deadline
The amendments have changed the annual reporting deadline for investment funds to January 30 for the reporting of all distributions in the previous calendar year made using the exemptions in sections 2.3, 2.10 and 2.19 of NI 45-106. Currently, investment funds have until 30 days after the end of the investments fund’s financial year. The CSA have provided a transition period to allow investment fund issuers that file annually to file the current Form 45-106F1 or the New Form 45-106F1 for distributions that occur before January 1, 2017.
Format of Reporting Form
The amendments provide that all distributions on or after June 30, 2016 are to be reported using New Form 45-106F1 in all provinces and territories of Canada. The New Form 45-106F1 replaces the current Form 45-106F1 and the current Form 45-106F6. There are also two schedules to New Form 45-106F1, both of which are to be completed in Excel format.
The New Form 45-106F1 will be filed with the BCSC through BCSC eServices, with the OSC through the OSC Portal and with all other jurisdictions through SEDAR (certain foreign issuers may still make paper filings, as provided below). The New Form 45-106F1 can be drafted within the OSC Portal or within BCSC eServices and the filed version from the OSC Portal or BCSC eServices, along with the Excel versions of the two proposed schedules can be submitted to the other jurisdictions.
Exemption from Filing on SEDAR
Under National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR), a foreign issuer that falls within the definition of “foreign issuer (SEDAR)” is not required to use SEDAR and may continue to file paper copies in all jurisdictions other than Ontario and B.C. (both of which require the use of their electronic filing systems). A foreign issuer can voluntarily elect to use SEDAR by filing a SEDAR Form 5 Notice of Election by Foreign Issuer(SEDAR).
Details Required in the New Form 45-106F1
The following is the list provided by the CSA in Annex 2 of CSA Notice 45-308:…
The various Canadian regulatory authorities recently overhauled how prospectus exempt rights offerings are to be conducted going forward, including allowing for larger financings to be completed in a shorter time frame with less extensive offering documents. As a result of these amendments (Amendments) which came into force on December 8, 2015, reporting issuers…
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In March 2014, certain members of the Canadian Securities Administrators proposed amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) with the aim of allowing business enterprises, with a focus on small and medium size enterprises, to benefit from greater access to capital from investors. On October 29, 2015, the securities authorities in…