The Canadian Securities Administrators (the CSA) recently published for comment proposed amendments (the Proposed Amendments) to National Instrument 45-106 – Prospectus Exemptions (NI 45-106), and certain other instruments and companion policies, which would create a new capital raising method for reporting issuers listed on a Canadian stock exchange (the Listed Issuer Exemption).
If the Proposed Amendments are adopted, reporting issuers would be able to rely on the Listed Issuer Exemption to issue freely tradeable equity securities to investors.
Rationale
The Listed Issuer Exemption is meant to provide a more efficient method for reporting issuers that have filed all timely and periodic disclosure documents required under applicable Canadian securities legislation and have securities listed on a Canadian stock exchange. According to the CSA, the Listed Issuer Exemption would benefit smaller reporting issuers as it would:
reduce the costs associated with accessing public markets;
allow smaller reporting issuers to access to public markets and retail investors;
provide retail 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 reporting issuers that previously only used the private placement system; and
provide an incentive for all reporting issuers raising smaller amounts of capital to do so by public offering instead of by private placement.
Qualification Criteria
In order to rely on the Listed Issuer Exemption, a reporting issuer would be required to:
have securities listed on a recognized Canadian stock exchange;
have been a reporting issuer for 12 months in at least one jurisdiction in Canada;
have filed all timely and periodic disclosure documents required under applicable Canadian securities legislation; and
have active business operations.
Offering Document
An issuer seeking to rely on the Listed Issuer Exemption would be required to prepare and file a short offering document (the Offering Document) on its SEDAR page and website. The Offering Document would contain prescribed disclosure, including:
any new developments in the issuer’s business;
the issuer’s financial condition, including confirmation that the issuer will have sufficient funds to last 12 months after the closing;
how proceeds from the offering will be used; and
how proceeds from any other offering in the past 12 months were actually used.
The Offering Document would not be subject to review by the CSA. However, issuers would be required to certify that the Offering Document, together with 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 Offering Document would be considered a “core document” in the issuer’s continuous disclosure record. In the event of a misrepresentation in the Offering Document or in the issuer’s continuous disclosure record for a prescribed period, purchasers relying on the Listed Issuer Exemption would have the same rights of action under secondary market civil liability as purchasers on the secondary market. Purchasers relying on the Listed Issuer Exemption would also have a contractual right of rescission against the issuer for a period of 180 days following the distribution in the event of a misrepresentation.
Additional Requirements and Considerations
Only equity securities, or securities convertible into equity securities, would be permitted to be distributed in reliance of the Listed Issuer Exemption. Importantly, the securities distributed would not be subject to any statutory hold periods. In addition, issuers would be limited in the amount that can be raised in reliance of the Listed Issuer Exemption. The total dollar amount that an issuer may raise using the Listed Issuer Exemption during any 12 month period may not exceed:
the greater of $5 million or 10% of the aggregate market value of the issuer’s listed equity securities, to a maximum total dollar amount of $10 million; or
100% dilution, based on the number of outstanding securities at the time the offering is announced.
The Listed Issuer Exemption would not be available to issuers intending to use the proceeds for a significant acquisition or restructuring transaction.
Prior to soliciting offers to purchaser securities, issuers would be required to disseminate a news release announcing a proposed offering and informing potential purchasers that they can access the Offering Documents on the issuer’s SEDAR page and website. Proposed distributions must be completed with 45 days of dissemination of such news release.
Final Thoughts and Next Steps
We believe that the costs of completing prospectus offerings are currently too high and likely a barrier to capital raising for smaller reporting issuers. Accordingly, we applaud the CSA for proposing the Listed Issuer Exemption, which should provide smaller issuers with access to public markets and retail investors in a more cost-efficient manner.
The CSA is accepting comments on the proposed Listed Issuer Exemption until October 26, 2021.
Please contact us if you would like further information on the Listed Issuer Exemption.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.