CSA PROPOSES AMENDMENTS TO PROSPECTUS EXEMPTION FOR RIGHTS OFFERINGS
The Canadian Securities Administrators (the “CSA”) recently published for comment proposed amendments to securities legislation (the “Proposed Amendments”) which, if adopted, would create a streamlined prospectus exemption for rights offerings conducted by reporting issuers.
A rights offering is the distribution of rights to purchase securities of an issuer made to that issuer’s existing security holders. Currently, an issuer can conduct a rights offering under a prospectus or under the prospectus exemption for rights offerings set out in National Instrument 45-106 – Prospectus and Registration Exemptions (the “Current Exemption”). Pursuant to the Current Exemption, an issuer must prepare and send security holders an extensive rights offering circular which must be filed and accepted by the securities regulators in the jurisdiction where the offering will be conducted prior to the commencement of the offering. This can increase the time and cost of conducting a rights offering. Issuers are also prohibited from issuing more than 25% of their securities in any 12 month period under the Current Exemption. This can restrict the ability of issuers with small market capitalizations from raising sufficient funds to make a rights offering worthwhile.
The CSA recognizes that issuers, especially issuers listed on the TSX Venture Exchange, very seldom use prospectus-exempt rights offerings because of the associated time and cost of complying with the Current Exemption. The CSA have designed the Proposed Amendments to make prospectus-exempt rights offerings more attractive to reporting issuers by creating a streamlined prospectus exemption (the “Proposed Exemption”) which, among other things, introduces a new user-friendly form of rights offering circular (the “Circular”), removes the current regulatory review process prior to the use of the Circular and increases the percentage of securities that issuers are permitted to issue upon the exercise of rights. A description of these changes and other key aspects of the Proposed Amendments are set out below.
Availability of the Proposed Exemption
The Proposed Exemption would only be available to reporting issuers, other than investment funds that are subject to National Instrument 81-102 – Investment Funds.
Disclosure Documents and the Regulatory Review Process
The CSA proposes a new form of notice (the “Notice”) that issuers would be required to file and send to security holders before using the Proposed Exemption. The Notice, which the CSA anticipates would be one to two pages long, would include basic disclosure about the rights offering and inform security holders how to access the Circular electronically.
Issuers would be required to prepare and file the Circular concurrently with the Notice prior to the commencement of the rights offering but would not have to send the Circular to security holders. The Circular would be in a question and answer format, which is intended to be easier for issuers to prepare and more straightforward for investors to understand. The Circular would focus on information about the rights offering, the use of funds available and the financial condition of the issuer and would not require information about the issuer’s business. The issuer would be required to certify that the Circular contains no misrepresentations. The CSA anticipates that the average Circular would be approximately 8 to 10 pages in length, which is significantly shorter than rights offering circulars prepared in connection with the Current Exemption (especially those prepared by mining issuers, which the CSA have found to be generally 30 pages long).
Under National Instrument 43-101 – Standards of Disclosure for Mineral Projects, with certain exceptions, a reporting issuer must file a technical report if a rights offering circular filed by the issuer contains scientific or technical information that relates to a mineral project on a property that is material to the issuer. Because the proposed form of Circular does not require an issuer to include technical or business disclosure, CSA staff do not anticipate that an issuer will trigger the technical report requirement unless it chooses to include technical disclosure in its Circular.
Unlike the Current Exemption where an issuer cannot use a rights offering circular until securities regulators have issued a notice of acceptance, under the Proposed Exemption CSA staff would not review the Notice or the Circular prior to use. However, for a period of two years from the adoption of the Proposed 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 Proposed Exemption and to ensure that issuers are complying with the conditions of the Proposed Exemption.
The Proposed Exemption provides for an increase in the dilution limit from 25% under the Current Exemption to 100%, assuming the exercise of all rights issued under the Proposed Exemption by the issuer during the proceeding 12 months.
Offer to All Security Holders
Under the Proposed Exemption, the issuer would be required to make the basic subscription privilege available on a pro rata basis to each Canadian security holder of the class of securities to be distributed on exercise of the rights. This differs from the Current Exemption where there is no requirement to offer rights to all security holders.
Under the Proposed Exemption, issuers with security holders in Quebec would also be required to translate the Notice and the Circular into French, even if the issuer is not a reporting issuer in Quebec.
For reporting issuers listed on a marketplace, the exercise price of a right would be required to be lower than the market price of the security issuable on exercise of the right at the time of filing the Notice.
For reporting issuers not listed on a marketplace, the exercise price of a right would be required to be lower than the fair value of the security issuable on exercise of the right at the time of filing the Notice.
Like the Current Exemption, securities issued under the Proposed Exemption would be subject to a seasoning period on resale meaning that, in most situations, there would be no restricted hold period.
A new prospectus exemption for securities issued to a stand-by guarantor as part of a distribution under the Proposed Exemption (the “Stand-by Exemption”) is being proposed. Under the Stand-by Exemption, the stand-by guarantor would have to acquire the securities as principal, and the securities issued under the Stand-by Exemption would be subject to a four month restricted hold period.
The CSA is considering whether securities issued to a stand-by guarantor who is a current security holder should be subject to a four month restricted hold period. If the CSA were to impose such a hold period on resale, the stand-by guarantor could still acquire free-trading securities under the basic subscription privilege. The four month hold period would only apply to securities issued to the stand-by guarantor as part of the stand-by commitment.
Statutory civil liability for secondary market disclosure provisions would apply to the acquisition of securities in a rights offering conducted pursuant to the Proposed Amendments. 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 documents, including the Circular.
The comment period regarding the Proposed Amendments closed on February 25, 2015. Please visit our blog for any updates on the Proposed Amendments.
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