No Relief Required: New and Improved Canadian Rules for “At-The-Market” Equity Offerings

On June 4, 2020, the Canadian Securities Administrators (CSA) published a notice of amendments (New ATM Rules) to National Instrument 44-102 Shelf Distributions and Companion Policy 44-102CP Shelf Distributions (collectively, the Shelf Rules).

The New ATM Rules are intended to replace the regulatory relief that has historically been required for issuers conducting at-the-market distributions (ATM Distributions) of equity securities over Canadian marketplaces. Provided all necessary ministerial approvals are obtained, the amendments will become effective on August 31, 2020. The amendments are part of the broader package of CSA capital markets burden reduction initiatives, a process that was kicked off in April 2017 with CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers.

BACKGROUND

The CSA first published for comment proposed amendments to the framework for ATM Distributions in May 2019 (Proposed Amendments), as discussed in our May 2019 Blakes Bulletin: CSA Propose Rules to Streamline "At-the-Market" Equity Offering Process for Canadian Issuers.

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. Currently, in order to implement a Canadian ATM Distribution program, the issuer and the program’s dealer(s) are required to obtain discretionary exemptive relief from the securities regulators from certain prospectus-related requirements (Discretionary Relief Regime). While exemptive relief orders for ATM Distribution programs have historically been issued as a matter of course, the orders are time consuming to obtain, add additional cost for issuers and have imposed certain conditions, including a cap on the number of shares that may be sold on the Toronto Stock Exchange (TSX) or any other Canadian marketplace on any trading day of 25 per cent of daily trading volume (25% Daily Sales Cap), and for certain aspects of the relief, a requirement that the equity securities be “highly-liquid securities” within the meaning of IIROC’s Universal Market Integrity Rules.

When the amendments become effective, issuers and program dealers will no longer have to apply for exemptive relief to conduct ATM Distributions. As discussed below, the amendments do not include certain conditions that have previously been included in historical exemptive relief orders.

THE AMENDMENTS

25% Daily Sales Cap Eliminated

The amendments do not include any 25% Daily Sales Cap.

The CSA had considered two approaches to the 25% Daily Sales Cap in the Proposed Amendments. One option would have imposed the 25% Daily Sales Cap, unless the securities were “highly-liquid securities” within the meaning of IIROC’s Universal Market Integrity Rules. The second option would not have imposed the 25% Daily Cap or the “highly-liquid securities” requirement.

In deciding to eliminate the 25% Daily Sales Cap entirely, the CSA acknowledged the importance of remaining alert to potential abuses and stated that the regulators intend to monitor ATM Distributions, focusing on distributions that may have had a material impact on the price of an issuer’s securities where prior public disclosure of the distribution was not made.

No Program Size Cap

Under the current Shelf Rules, 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, excluding securities held by insiders (10% Cap). The amendments 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 a Marketplace

The amendments have corrected a drafting issue in the Proposed Amendments that would have limited execution of sales under ATM Distributions to Canadian exchanges. Under the New ATM Rules sales under ATM Distributions may be executed on any marketplace, consistent with the approach under the Discretionary Relief Regime.

New Requirement: Cover Page Disclosure

The New ATM Rules impose a new requirement that the cover page of the base shelf prospectus that may be used for an ATM Distribution program state that it may qualify an ATM Distribution. In this regard, the companion policy language included in the Amendments states that:

“The 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 further review of certain factors that are considered during the review of a base shelf prospectus, such as the sufficiency of proceeds, an issuer’s business or a recent reverse take-over of former shell companies.”

The CSA states that the cover page disclosure requirement provides important information to investors and other market participants and that review of this information by securities regulatory authorities may result in further consideration of certain factors that would have been considered in any case. Issuers that have filed a base shelf prospectus prior to August 31, 2020, and have applied for and obtained an exemption under the Discretionary Relief Regime in connection with an ATM Distribution will be grandfathered until the base shelf prospectus and exemption expire, and will be permitted to conduct ATM Distributions under that previously-filed base shelf prospectus, notwithstanding that the cover page disclosure may not be included in the base shelf prospectus.

Elimination of Monthly Reporting Requirement

The New ATM Rules completely eliminate the requirement to report sales under ATM Distribution programs on a monthly basis, which requirement was a feature of many of the discretionary exemptions under the Discretionary Relief Regime. The Proposed Amendments would only have eliminated this requirement for issuers of “highly liquid securities,” an approach which would have been consistent with more recent discretionary relief orders issued to more senior issuers.

In the final analysis, and consistent with the approach taken to the 25% Daily Sales Cap, the regulators decided not to tie the availability of quarterly reporting to the definition of a “highly liquid security,” and instead have made this option available to all issuers, generally on the basis that the monthly disclosures were not necessary for investor protection. Accordingly, under the New ATM Rules, for each annual and interim period of the issuer during which the issuer distributes securities pursuant to an ATM Distribution, the issuer must file a report disclosing: (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 during the period, within 60 days after the end of the interim period or 120 days after the end of the annual period, as applicable. Issuers can satisfy this obligation by including the required to disclosure in their interim financial reports, annual financial statements and accompanying management discussion and analysis.

Designated News Releases

In order to ensure that a prospectus supplement filed in respect of an ATM Distribution contains full, true and plain disclosure of all material facts related to the securities distributed under the ATM prospectus, the New ATM Rules permit issuers to supplement a prospectus supplement by issuance of a designated news release (Designated News Release), rather than filing a new prospectus supplement or an amended prospectus. A Designated News Release should be identified as such on the face page of the version of the filed news release, and the prospectus should provide that any such Designated News Release will be deemed to be incorporated by reference into the prospectus. This feature of the New ATM Rules is consistent with recent discretionary relief orders issued to senior issuers under the Discretionary Relief Regime.

French Translation

The New ATM Rules do not directly address Quebec’s translation requirements. However, the CSA states in the notice of amendments that the Autorité des marchés financiers (AMF) will analyze the merits of any exemptive relief application from the translation requirements and, if appropriate, grant relief from the obligation to translate the offering documents. The implication is that the AMF will expect an issuer to either comply with Quebec’s translation requirements or obtain relief from such requirements in order to conduct ATM Distributions over Canadian marketplaces.

Investment Funds

The amendments permit ATM Distributions by all non-redeemable investment funds (NRIFs) and exchange-traded mutual funds that are not in continuous distribution (ETFNCDs).

Additionally, exchange-traded mutual funds (ETFs) that are in continuous distribution—meeting the definition of an “ETF” under National Instrument 41-101 General Prospectus Requirements (NI 41-101)—are also able to rely on the amendments, and would be required to comply with all requirements applicable to an ETF under NI 41-101. A mutual fund that is traded on an exchange that frequently makes ATM Distributions would be considered to be in continuous distribution, and so must also comply with all ETF requirements.

The amendments have also added a requirement that investment funds conducting ATM Distributions include a statement in the prospectus that any ATM Distributions will be conducted in accordance with paragraph 9.3(2)(a) of National Instrument 81-102 Investment Funds, which requires the issue price of a security of an ETFNCD, or of an NRIF, to not, as far as reasonably practicable, be a price that causes dilution of the net asset value of other outstanding securities of the investment fund at the time the security is issued.

Transition

The Proposed Amendments were silent as to how issuers and dealers currently using ATM Distribution programs established under the Discretionary Relief Regime would be able to transition to the new regime. As noted above, the New ATM Rules address transition issues by providing that an issuer with an outstanding base shelf prospectus filed prior to August 31, 2020, under which the issuer is qualified to make an ATM Distribution pursuant to a discretionary relief order, will not be required to re-file the base shelf prospectus to comply with the cover page disclosure requirement in the New ATM Rules. Any other provisions of part 9 of NI 44-102—including the amendments—that do not mirror an issuer’s discretionary relief order may be addressed in a prospectus supplement.

CONCLUSION

The New ATM Rules are, in light of the uncertain and volatile equity market conditions prevailing during COVID-19, a timely effort by the CSA to reduce regulatory burden and streamline the ATM Distribution process. The New ATM Rules broadly reflect the relief historically granted under the Discretionary Relief Regime, while also eliminating most—if not all—of the requirements under that regime that reduced the usefulness of ATM Distribution programs to issuers. All in all, the New ATM Rules should be a welcome development for issuers looking for timely, cost effective access to Canada’s equity capital markets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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