On May 9, 2019, the Canadian Securities Administrators (CSA) published for comment proposed amendments (Proposed Amendments) to National Instrument 44-102 Shelf Distributions and its companion policy (Shelf Rules) that would permit “at-the-market” distributions of equity securities (ATM Distributions) in Canada to proceed without the need for an exemptive relief order from Canadian securities regulators.
Comments on the Proposed Amendments are due by August 7, 2019.
What Is an “At-The-Market” Equity Offering?
ATM Distributions are a form of prospectus offering whereby a registered dealer sells equity securities, typically on behalf of an issuer, over an existing trading market at prevailing market prices. There is no “book-build” process for an ATM Distribution. That is, neither the dealer nor the issuer undertakes any marketing efforts (e.g., roadshows) in connection with an ATM Distribution program. Sales under an ATM Distribution are instead analogous to ordinary brokerage transactions, and an issuer typically will use an ATM Distribution program to “dribble out” equity securities into the market for normal course balance sheet management purposes, or if market conditions render other follow-on equity financing alternatives (e.g., a bought deal) less attractive.
Canada’s Current ATM Distribution Regime
Securities to be issued in an ATM Distribution are required to be qualified for distribution under a base shelf prospectus and a prospectus supplement. In addition, in order to implement a Canadian ATM Distribution program, the issuer and the program’s dealer(s) currently are required to obtain discretionary exemptive relief from the securities regulators (i) from the requirement to physically deliver a prospectus to purchasers in the ATM Distribution; (ii) to state that the right of purchasers to withdraw from the purchase during the two business days after the delivery of the prospectus does not apply to an ATM Distribution; and (iii) to state that the right of action against a dealer for non-delivery of the ATM Distribution prospectus does not apply (collectively, the Discretionary Relief Regime).
Exemptive relief orders for ATM Distribution programs are issued as a matter of course. However, the orders are time consuming to obtain, add additional cost for issuers and impose certain conditions, including:
A cap on the number of shares that may be sold on the TSX or any other Canadian marketplace on any trading day of 25 per cent of daily trading volume (25% Daily Sales Cap)
A requirement that certain issuers file on SEDAR, for any month during which shares are sold on a Canadian marketplace under the ATM Distribution 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 (Monthly Reporting Requirement).
For additional background on the regulation of ATM Distributions in Canada, please see our February 2016 Blakes Bulletin: “At-The-Market” Offerings by Canadian Issuers.
HIGHLIGHTS OF THE PROPOSED AMENDMENTS
The Proposed Amendments would:
Potentially eliminate the 25% Daily Sales Cap
Eliminate the 10 per cent cap on program size
Require Canadian ATM Distributions to be executed on an “ATM exchange”
Require cover page disclosure in a base shelf prospectus for an ATM Distribution
Permit closed-end funds and certain ETFs to make ATM Distributions
Eliminate the Monthly Reporting Requirement for issuers of highly liquid securities
Recognize “designated news releases” as a mechanism for incorporating “material facts” into an ATM Distribution prospectus
Daily Sales Cap
The CSA’s Proposed Amendments include two alternative approaches to the 25% Daily Sales Cap.
The first option (Option 1) would impose the 25% Daily Sales Cap only in respect of securities that are not “highly liquid securities”. The definition of “highly liquid securities” has been harmonized with the definition under IIROC’s Universal Market Integrity Rules and includes securities that, over a prior 60-day period, have traded an average of at least 100 times per day with an average trading value of at least C$100,000 per trading day.
One potentially important difference from the way the 25% Daily Sales Cap works under Option 1, as compared to the Discretionary Relief Regime, is that both the numerator and the denominator in the cap calculation would include trading volume on marketplaces outside Canada, meaning that, for a cross-border ATM Distribution program for an inter-listed issuer, the 25 per cent constraint may apply to U.S. and Canadian sales combined. Under the Discretionary Relief Regime, the 25% Daily Sales Cap only applied to sales over Canadian exchanges and marketplaces, and the denominator in the cap calculation only included Canadian trading volume.
Also notable is that the 25% Daily Sales Cap remains the same in one (perhaps significant) way: the denominator of the cap would still be that day’s trading volume, a feature which reduces certainty and flexibility with respect to the size of trades that may be executed during the trading day, and which requires traders to rely (in certain circumstances) on market-on-close orders or trading algorithms that monitor volume throughout the day. A potential fix would be to adjust the calculation so that the denominator is the prior day’s trading volume or the average volume over some number of trading days prior to the relevant trading day.
The second option (Option 2) would be to impose no cap at all, regardless of whether or not subject securities are “highly liquid.” Option 2 is consistent with the U.S. Securities and Exchange Commission’s approach and is based on the premise that market dynamics sufficiently incentivize an issuer not to conduct ATM Distributions in a way that would materially impact the trading price of its equity. Additionally, the dealer is prohibited under IIROC rules from trading in a manner that would disrupt a fair and orderly market for the shares.
Program Size Cap
The Shelf Rules currently impose a program cap of 10 per cent of the aggregate market value of the issuer’s outstanding equity securities of the same class, excluding securities held by insiders (10% Cap). The Proposed Amendments would eliminate the 10% Cap, on the basis that the dilution concerns underlying the 10% Cap are addressed via other mechanisms, including existing prospectus and continuous disclosure requirements and the requirement to engage a registered dealer for an ATM Distribution program.
Execution on an ATM Exchange
The Proposed Amendments would require ATM Distributions to be made through an “ATM exchange,” a defined term that includes, in Canada, only the TSX, the TSXV, Aequitas NEO and the Canadian Securities Exchange. This is different from the current approach under the Discretionary Relief Regime, which permits dealers to execute ATM Distribution sales on any Canadian exchange or marketplace, including alternative trading systems.
This change in approach is not discussed in the notice for the Proposed Amendments or in the Companion Policy, and so the reasoning behind the change is not clear. It is also not entirely clear how a requirement to execute on an “ATM exchange” is conceptually consistent with dealers’ best execution obligations under National Instrument 23-101 Trading Rules and the IIROC rules.
New Requirement: Cover Page Disclosure
The Proposed Amendments would impose a new requirement that the cover page of the base shelf prospectus for an ATM Distribution program state that it may qualify an ATM Distribution. In this connection, the companion policy language included in the Proposed Amendments states that “[t]he securities regulatory authorities are of the view that a base shelf prospectus that is intended to qualify an at-the-market distribution may result in additional review respecting sufficiency of proceeds, an issuer’s business or a recent reverse take-over of former shell companies.”
Closed-end Funds & ETFs
The Proposed Amendments would permit ATM Distributions by closed-end funds and ETFs that are not in continuous distribution and would not impose any additional requirements on such funds above and beyond what is already required under National Instrument 81-102 Investment Funds.
Elimination of Monthly Reporting Requirement
Consistent with some of the Canadian securities regulators’ more recent exemptive relief decisions, the Proposed Amendments would, where the securities distributed in the ATM Distribution program are “highly liquid securities,” eliminate the Monthly Reporting Requirement as long as the issuer, in its annual financial statements, interim financial reports, and management discussion and analysis filed on SEDAR, for the year and period immediately following the distribution, discloses: (i) the number and average price of the securities distributed under the ATM prospectus, and (ii) the aggregate gross and net proceeds raised, and the aggregate commissions paid or payable, under the ATM Distribution program to date.
Designated News Releases
The companion policy language included in the Proposed Amendments states:
“To ensure an ATM prospectus includes full, true and plain disclosure of all material facts related to the securities distributed under the ATM prospectus, the issuer may file a designated news release rather than filing a prospectus supplement or an amended prospectus. If an issuer disseminates a news release disclosing information that, in the issuer’s determination, constitutes a “material fact”, the issuer should identify the news release as a “designated news release” for the purposes of the ATM prospectus. This designation should be made on the face page of the version of the news release filed on SEDAR. An ATM prospectus should provide that any such designated news release will be deemed to be incorporated by reference into the ATM prospectus.”
The “designated news release” mechanic has been a feature of most of the Canadian securities regulators’ recent exemptive relief decisions for ATM Distributions.
Potential Transition Issues
The Proposed Amendments are silent as to how issuers and dealers currently using ATM Distribution programs established under the Discretionary Relief Regime would be impacted by the Proposed Amendments becoming law. Similarly, no guidance is provided with respect to whether or how the substance of the Proposed Amendments may be reflected in exemptive relief orders to be issued by the regulators in the meantime.
Although there has not yet been a secondary offering made by way of ATM Distribution in Canada, the Shelf Rules (as currently drafted) do not appear to preclude the possibility. The Proposed Amendments, however, appear to contemplate ATM Distributions by issuers only. It is unclear whether this is inadvertent or a conscious policy choice on the part of the regulators, since neither the notice for the Proposed Amendments nor the proposed companion policy guidance mentions secondary offerings. We understand that secondary ATM Distributions are relatively common in the U.S. market.
Location of ATM Distributions
The proposed companion policy guidance highlights certain issues with respect to where an ATM Distribution occurs, since sales are made over an exchange and the purchaser is unknown to the seller:
“Issuers are required to file a prospectus in every jurisdiction where a distribution will occur. However, because purchases in an at-the-market distribution are made directly on a securities exchange, it is difficult to determine where a distribution will occur because issuers and dealers are unable to determine where a purchaser is located at the time of the trade. As a result, it is possible that purchasers under an at-the-market distribution can be located in any jurisdiction of Canada.”
This language appears to indicate that an issuer pursuing an ATM Distribution will need to qualify its base shelf prospectus in all the provinces and territories of Canada, and pay any applicable fees in all provinces and territories. In addition, it would similarly appear that French translation would be required for all documents incorporated by reference in the prospectus for an ATM Distribution program, unless an exemption from Quebec’s translation requirements can be obtained. This additional cost and administrative burden may, for certain issuers, reduce the appeal of a Canadian ATM Distribution program.
The CSA stated they welcome comments on the Proposed Amendments, in particular on the following:
Whether the “highly liquid security” test or 25% Daily Sales Cap are necessary to reduce the impact of ATM Distributions on the market price of an issuer’s securities
Whether the issuance of debt securities under an ATM Distribution should be permitted
Certain aspects of the Proposed Amendments as they relate to closed-end funds and ETFs that are not in continuous distribution.