On June 4, 2020, the Canadian Securities Administrators (CSA) published amendments to National Instrument 44-102 – Shelf Distributions (NI 44-102) and Companion Policy 44-102CP Shelf Distributions. Proposed amendments were initially published by the CSA in May 2019, as reported in our previous blog post, Proposed Amendments to Rules Applicable to At-the-Market Distributions. The amendments revise the rules applicable to at-the-market distributions (ATM Distributions) in Canada and eliminate the need to obtain exemptive relief. The amendments are expected to be made by each member of the CSA and, pending ministerial approvals, are expected to become effective on August 31, 2020.
What is an ATM Distribution and Why the Need for Change?
An ATM Distribution is a distribution of securities by an issuer under a base shelf prospectus through the facilities of one or more public markets using a registered investment dealer acting as an agent. ATM Distributions have become common in the U.S. as issuers seek alternatives to traditional capital raising methods, which are typically more costly and less flexible. In Canada, the use of ATM Distributions has been less common. Industry participants have observed that the lack of ATM Distributions in Canada may be due to restrictions and obligations imposed by the current regulatory requirements.
Current Distribution Requirements
Part 9 of NI 44-102 contains certain requirements applicable to an ATM Distribution. However, NI 44-102 does not address certain prospectus-related requirements (i.e., delivery requirements, form of certificates, rescission language etc.) which are impracticable in the context of an ATM Distribution. Accordingly, issuers are also required to obtain exemptive relief (exemption order) if they wish to conduct ATM Distributions in Canada. Although such exemption orders are routinely issued by the securities regulatory authorities in Canada, obtaining an exemption order is still a time consuming and costly process for issuers.
NI 44-102 places an arbitrary ceiling on the amount that can be raised pursuant to a single ATM Distribution. Pursuant to NI 44-102, the market value of securities distributed under an ATM Distribution may not exceed 10 percent of the aggregate market value of the issuer's outstanding equity securities of the same class (10-Percent Limit). If an issuer seeks to raise an amount greater than 10 percent of its market value, it would need to conduct multiple ATM Distributions.
Additionally, the exemption orders that are granted in connection with ATM Distributions typically contain additional restrictions that issuers and underwriters must abide by. For example, exemption orders have historically capped the aggregate number of securities of the class being distributed that may be sold on a marketplace in Canada on any trading day at 25 percent of the daily trading volume.
These limitations, in addition to the need to obtain an exemption order, likely contribute to why ATM Distributions have historically been underutilized in Canada.
The CSA seeks to reduce the regulatory burden on issuers wishing to conduct an ATM Distribution by implementing the amendments, which include:
- an exemption for the underwriter from the requirement to deliver a prospectus to purchasers;
- an exemption for the issuer and underwriter from certain prospectus form requirements, including an alternative statement of statutory rights and alternative certificate forms;
- the removal of the 10-Percent Limit.
In addition, as discussed in our previous blog post, the CSA had previously proposed two approaches regarding the trading volume and liquidity requirements applicable to ATM Distributions. The CSA has made the decision to adopt "Option 2", under which, in addition to the points enumerated above, the daily aggregate number of the securities of the class distributed by an issuer will not be capped at any amount. Given that issuers are required to retain an investment dealer to conduct an ATM Distribution, the CSA feels that there is a low risk of negative impact on market activity. Issuers themselves are also inherently incentivized to not conduct ATM Distributions that have a negative impact on the market for their securities.
Ultimately, the amendments will eliminate the need for issuers to obtain an exemption order, without compromising investor protection or the efficiency of the capital markets.
The Future of ATM Distributions in Canada
The amendments are an overdue change to Canadian regulatory requirements and will likely result in faster and less costly access to capital for issuers.
The implementation of the amendments and the accompanying reduction in the regulatory burden will help to align Canada's regulatory requirements with U.S. rules. We expect that this will lead to an increase in the frequency in the use of ATM Distributions over Canadian exchanges. Issuers with outstanding ATM Distributions should review the terms of their equity distribution agreement and prospectus supplement to determine how best to take advantage of these amendments.