Securities Alert – October 2015
Canadian Securities Administrators (“CSA”) Adopt Revised Rights Offering Exemption
Faster but more Exclusive – Comes into Effect on December 8, 2015
The CSA announced the adoption of an amendment to National Instrument 45-106 Prospectus and Registration Amendments (“NI 45-106”) designed to create a streamlined prospectus exemption for rights offerings conducted by reporting issuers (the “New Rights Offering Exemption”).
Rights offerings are one of the fairer ways for issuers to raise capital as they provide security holders with an opportunity to protect themselves from dilution. However, issuers have seldom used prospectus-exempt rights offerings because of the associated time and cost.
In contrast to the current rights offering exemption, which is available to all issuers, the New Rights Offering Exemption will only be available for reporting issuers, other than investment funds. Reporting issuers will have to file and send to security holders a new form of notice before using the New Rights Offering Exemption (the “Notice”). The Notice will provide basic disclosure about the offering and will inform security holders how to access the rights offering circular. The Notice (or Form 45-106F14) is approximately two pages long.
Issuers will also have to prepare and file a new form of rights offering circular (the “Circular”) but will not have to send the Circular to security holders. All disclosure in the Circular will be in a question and answer format that focuses on information about the rights offering, the use of funds available and the financial condition of the issuer. The issuer must also certify the Circular contains no misrepresentations and that there is no material fact or material change related to the issuer that has not been generally disclosed.
Under the current exemption, an issuer cannot use a circular until CSA staff has issued a notice of acceptance. Under the New Rights Offering Exemption, CSA staff will not review the Notice or Circular prior to use. However, for a period of two years from the adoption of the New Rights Offering Exemption, CSA staff in certain jurisdictions intend to conduct reviews of Circulars (in most cases, on a post-distribution basis) to understand how issuers are using the New Rights Offering Exemption and to ensure that issuers are complying with the conditions of the New Rights Offering Exemption.
The New Rights Offering Exemption will not be available where there would be an increase of more than 100% in the number of outstanding securities of the class to be issued upon exercise of rights, assuming the exercise of all rights issued under the New Rights Offering Exemption by the issuer during the preceding 12 months.
Under the New Rights Offering Exemption, issuers will be required to file and send the Notice prior to the start of the exercise period and to file the Circular concurrently with the Notice. The exercise period is a minimum of 21 days and a maximum of 90 days. The issuer must make the basic subscription privilege available on a pro rata basis to each security holder of the class of securities to be distributed on exercise of the rights. For reporting issuers that are listed on a marketplace, the subscription price for a security issuable on exercise of a right must be lower than the market price at the time of filing the Notice. For reporting issuers not listed on a marketplace, the subscription price for a security issuable on exercise of a right must be lower than fair value at the time of filing the Notice.
A condition of the New Rights Offering Exemption is that the issuer must file a closing news release. The closing news release must contain prescribed information about the rights offering, such as the aggregate gross proceeds and amounts of securities distributed under each of the basic subscription privilege, the additional subscription privilege and the stand-by commitment.
The New Rights Offering Exemption is subject to a seasoning period on resale meaning that, in most situations, there will be no hold period. The statutory civil liability for secondary market disclosure provisions will apply to the acquisition of securities in a rights offering. This is intended to ensure that investors relying on a Circular have rights of action in respect of a misrepresentation in an issuer’s continuous disclosure, including the Circular.
When the new exemption is adopted on December 8, 2015, the CSA will simultaneously repeal National Instrument 45-101 – Rights Offerings (“NI 45-101”), which will remove the ability of non-reporting issuers to make a rights offering. Any rights offerings contemplated under NI 45-101 must be completed prior to December 8, 2015. On December 8, the New Rights Offering Exemption will change the capital raising potential of both reporting and non-reporting issuers, albeit in very different ways.
For more than 40 years, Perley-Robertson, Hill and McDougall has provided financing solutions to a wide variety of clients, including privately held companies, public companies, reporting issuers and companies listed on NASDAQ, the Toronto Stock Exchange, the TSX Venture Exchange and various OTC and private markets. In addition to providing advice on securities registration and compliance, we have completed venture capital funding transactions, debt and/or equity private placements, initial public offerings, prospectus offerings, capital pool company listings and qualifying transactions, reverse takeovers and limited partnership fundings. Whatever your financing requirements, we are confident we can find a cost efficient solution tailored to your needs.
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