On April 20, 2017, the Canadian Securities Administrators (CSA) released Staff Notice 45-323 (Notice). The Notice provided an update on the use of the rights offering exemption available to reporting issuers (Exemption) under section 2.1 of National Instrument 45-106 Prospectus Exemptions, as of December 31, 2016, approximately one year after it was adopted in its current form.
A rights offering is intended to allow reporting issuers to raise capital, while providing an opportunity for existing security holders to protect themselves from dilution by participating in the offering on the basis of their proportional interest. In its original form, prospectus-exempt rights offerings were underutilized, as the excessive time and costs associated with such offerings made them an unappealing option for issuers. On December 8, 2015, in an effort to encourage greater use of prospectus-exempt rights offerings, the Exemption was amended to require simplified plain-language offering materials, often using a question and answer format, and allowing for an increased dilution limit of 100%.
In the Notice, the CSA noted that in the first year of the amended Exemption, the time required to complete a rights offering was reduced from approximately 85 days to approximately 38 days. It is therefore not surprising that a total of 30 rights offerings were completed across all industries, raising approximately $247.6 million – a marked increase from the past average of 13 rights offerings per year. In these 30 rights offerings, an average of 39% of the outstanding securities of a certain class were issued and 48% of the amounts being raised were from insiders who often acted as stand-by guarantors.