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.

General Framework

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.

Prospectus Supplement

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.

Distribution Agreement

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.


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Background

On December 18, 2014, the Investment Industry Regulatory Organization of Canada (IIROC) published its final guidance note outlining common due diligence practices and suggestions for IIROC dealer members (Dealer Members) in underwritten public offerings of securities.  The guidance note follows IIROC’s March 6, 2014 proposed guidance and a three month public comment period.

The guidance note urges Dealer Members to take an approach to due diligence that goes beyond the mere avoidance of liability and mitigation of risk to the underwriter as Dealer Members play a role in protecting investors, fostering fair and efficient capital markets and creating and maintaining confidence in the capital markets.

The guidance note was prepared specifically to address Dealer Members involved in public offerings of securities. Although the March 6, 2014 proposed guidance indicated that some aspects of the guidance may be helpful to Dealer Members in the context of private placements, such reference to private placements was removed in the final guidance note.

Nine Principles of Underwriting Due Diligence

The guidance note is designed to promote consistency and enhanced underwriting due diligence standards among Dealer Members.  It sets out nine principles which underwriters should consider in the context of their due diligence of the issuer. These are:
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