Recent capital markets conditions have made at-the-market (ATM) offerings an attractive alternative to traditional follow-on equity offerings. ATM offerings reduce execution risk by permitting equity to be sold into the market over an exchange at prevailing market prices. While U.S. issuers have utilized ATM offerings for many years as part of their balance-sheet management strategies, this technology has only relatively recently started to gain traction in Canada.
ATM offerings are executed, typically on an agency basis, through a registered dealer that sells into the trading market on an issuer’s behalf pursuant to a distribution agreement. In contrast to an underwriting agreement for a traditional securities offering, executing a distribution agreement with a dealer does not obligate the issuer to issue or sell any securities. Rather, executing the distribution agreement, in addition to taking other steps required under securities legislation (described below), sets up a program that enables the issuer to, at its option, access the public equity markets on short notice.
If an issuer elects to issue securities under its ATM program, it delivers a written “sell notice” to the program’s dealer. The sell notice typically specifies minimum acceptable pricing for the offered shares, a maximum number of shares that may be sold and execution timing. Neither the dealer nor the issuer engage in any marketing efforts (e.g., roadshows) for an ATM offering. Sales under an ATM program are instead analogous to ordinary brokerage transactions, except that the issuer is placing the order to sell, rather than a shareholder or other market participant.
As in traditional underwritten equity offerings, dealers in ATM offerings are subject to underwriter liability. Distribution agreements for ATM programs therefore provide customary underwriter protections, including representations and warranties from the issuer and comfort letters from the issuer’s auditors. The dealer and its counsel also typically undertake due diligence procedures that are substantially the same as would be undertaken for an underwritten offering, including, for example, conducting legal due diligence and management Q&A sessions. In light of the ongoing nature of an ATM program, the distribution agreement will provide for periodic updates to the issuer’s representations and warranties, the auditor’s comfort letters and dealer due diligence.
PRINCIPAL LEGAL AND REGULATORY CONSIDERATIONS
In order to set up an ATM program an issuer must:
Qualify with Canadian securities regulators a base shelf prospectus that is unallocated between debt and equity securities. Clearing comments from the designated Canadian securities regulator on the base shelf prospectus generally takes one or two weeks. The “plan of distribution” disclosure in the base shelf prospectus should describe that the issuer may engage in non-fixed price offering transactions under the shelf. The dealer or dealers involved in the ATM offerings are not required to be named in the base shelf prospectus.
Apply to list on the Toronto Stock Exchange (TSX) and, if applicable, on the New York Stock Exchange (NYSE) or NASDAQ the maximum number of shares permitted to be sold under the distribution agreement.
After the final base shelf prospectus is receipted and the distribution agreement has been executed, the issuer must file a prospectus supplement disclosing the terms of the ATM offering, including identifying the dealers, the commissions payable to the dealers and the maximum number of shares to be sold in the offering. The market value of equity securities sold under a single ATM offering prospectus supplement may not exceed 10 per cent of the aggregate market value of the issuer’s outstanding equity securities of the same class (such securities held by holders of 10 per cent or more of the issuer’s securities of the class are generally excluded from the calculation of the number of securities outstanding). The prospectus supplement is typically a brief document that is not reviewed by the regulators.
Since sales under an ATM program are executed over exchanges or alternative trading systems, typically anonymously, it is impracticable for issuers and dealers to deliver a prospectus to purchasers that buy in an ATM offering. Therefore, to implement an ATM program, the issuer is required to obtain regulatory relief under Canadian securities legislation (i) from the requirement to physically deliver a prospectus to purchasers in a distribution of securities; (ii) to state that the right of the purchasers of the securities to withdraw from the purchase during the two business days after the delivery of the prospectus does not apply; and (iii) to state that the right of action against the dealer for non-delivery of the prospectus does not apply. Exemptive relief orders for ATM programs are issued as a matter of course, however, the orders have historically capped the number of shares that may be sold on the TSX or any other marketplace on any trading day at 25 per cent of daily trading volume and required that the issuer file, for any month during which shares are sold on a Canadian marketplace under the ATM program, a report disclosing the number and average price of shares distributed over the month, as well as total gross proceeds, commission and net proceeds, within seven calendar days after the end of the month. Such disclosure is in addition to disclosures regarding any ATM offerings that are required to be made in the issuer’s quarterly and annual continuous disclosure filings.
ADVANTAGES AND CONSIDERATIONS
The main advantage of an ATM program is its flexibility: it allows the issuer to control the timing, amount and minimum acceptable price of a sale of equity securities. The related, but countervailing, consideration is that ATM programs may be less useful to issuers seeking to raise large amounts of capital due to the aggregate size and daily trading constraints. Taken together, these characteristics have led to ATM programs typically being used by issuers for capital management purposes, rather than for “event driven” financings.
Additional advantages of ATM offerings are that they require relatively little management involvement (i.e., no roadshows), allow issuers to tap the market when traditional methods of raising capital may be unavailable, may permit issuers to benefit from rising stock prices, and may be deployed in conjunction with a traditional equity deal (said another way, putting an ATM program in place does not preclude simultaneously pursuing a traditional marketed or bought equity deal).
The countervailing considerations are that the “equity overhang” market impact of announcing an ATM program is unclear, the speed at which capital can be raised is highly dependent on how liquid a particular stock is, and initial setup, ongoing due diligence and monthly reporting costs may make an ATM program unattractive depending on the issuer’s financial position.
CROSS-BORDER ATM CONSIDERATIONS
For Canadian issuers that are also listed on the NYSE or NASDAQ and have an equity shelf in place in the U.S. (typically under the multi-jurisdictional disclosure system, or “MJDS”), a cross-border ATM program may be implemented. In fact, as long as U.S trading volume is sufficiently high relative to Canadian trading volume, interlisted Canadian issuers may decide to utilize their MJDS shelves to execute “U.S. only” ATM offerings. The equity securities distributed under the ATM offering would be listed on both the TSX and the U.S. exchange. An advantage of a U.S. only ATM offering is that there is no requirement to obtain from Canadian regulators the exemptive relief described above, since U.S. only ATM programs are restricted to sales on U.S. exchanges, and therefore the issuer may rely on the U.S. Securities and Exchange Commission’s “access equals delivery” principles in respect of U.S. prospectus delivery requirements.