On September 24, 2015, the Canadian Securities Administrators (CSA) announced the adoption of amendments to the prospectus-exempt rights offering regime (Rights Offering Exemption) to create a more streamlined process and allow reporting issuers — other than investment funds subject to National Instrument 81-102 Investment Funds — to issue up to 100 per cent of outstanding securities without the use of a prospectus and without prior review of the rights offering document by the CSA. The amendments under the new Rights Offering Exemption are intended to make the prospectus-exempt rights offering more attractive to reporting issuers by reducing the time and costs associated with rights offerings in Canada and by increasing the potential size of the rights offering that an issuer can undertake.
Consistent with current practices, a rights offering under the new Rights Offering Exemption must still be open for a minimum of 21 days and a maximum of 90 days and commence after the day the rights offering notice is sent to securityholders, during which time securityholders can exercise their rights to subscribe to their pro rata allocation of securities. However, under the previous prospectus exemption for rights offerings, there was an onerous and time-consuming regulatory review process and more restrictive dilution limit.
These amendments were originally published by the CSA for public comment on November 27, 2014, and are expected to come into force on December 8, 2015. For background information regarding the proposed amendments, please see our December 2014 Blakes Bulletin: Looking to Raise Capital? Doing a Rights Offering in Canada May Get Easier.
NEW RIGHTS OFFERING EXEMPTION: KEY ELEMENTS
To rely on the previous exemption, the rights offering could not increase the number of outstanding securities by more than 25 per cent, assuming the exercise of all rights issued under the exemption during the preceding 12 months. The amendments under the new Rights Offering Exemption will increase the permitted dilution limit to 100 per cent.
Rights Offering Notice and Rights Offering Circular
Under the existing regime, the issuer must deliver a draft rights offering circular in the prescribed form to the CSA, who must then not object to the offering before the final circular can be delivered to securityholders to commence the exercise period.
Under the new Rights Offering Exemption, reporting issuers will have to file on System for Electronic Document Analysis and Retrieval (SEDAR) and send to securityholders a rights offering notice in the new Form 45-106F14 – Rights Offering Notice for Reporting Issuers (Rights Offering Notice). The Rights Offering Notice in the prescribed form shall be prepared using plain language and presented in a question and answer format to provide basic information about the offering, including how to access the rights offering circular electronically, and should not be longer than two pages in length.
Concurrently with the filing of the Rights Offering Notice, reporting issuers will file on SEDAR (but will not be required to send to securityholders) the new simplified rights offering circular Form 45-106F15 – Rights Offering Circular for Reporting Issuers (Rights Offering Circular). The Rights Offering Circular in the prescribed form shall also be presented in a question and answer format in order to provide information about the rights offering and details of how an existing securityholder can exercise the rights and should not be longer than ten pages in length. In addition, the Rights Offering Circular shall disclose any material facts and material changes that have not yet been disclosed and include a statement that there are no undisclosed material facts or material changes.
Neither the Rights Offering Notice nor the Rights Offering Circular will be subject to the advance review and approval by the CSA, which is expected to greatly reduce the time and cost associated with a rights offering under the existing regime. In addition, business information (including technical information in the case of resource-based issuers) will not generally be required to be included in the Rights Offering Circular. However, the Rights Offering Circular does require disclosure of any previously undisclosed material fact or material change. Only if such information is required to be included and it contains new material scientific or technical information regarding a mineral project on a property that is material to the issuer will the requirement for resource-based issuers to file updated technical reports under National Instrument 43-101 Standards of Disclosure for Mineral Projects along with the Rights Offering Circular be triggered.
Under the new Rights Offering Exemption, the subscription price for a security to be issued upon the exercise of a right must be lower than: (i) for listed issuers, the market price of the security on the day the Rights Offering Notice is filed, and (ii) for non-listed issuers, the fair value of the security on the day the Rights Offering Notice is filed unless the issuer restricts all of its insiders from increasing their proportionate interest in the issuer through the exercise of the rights distributed or through a stand-by commitment.
Under the new Rights Offering Exemption, the issuer must make the basic subscription privilege available on a pro rata basis to all its securityholders, resident in Canada, of the class of securities to be distributed upon the exercise of the rights. The issuer may also offer its existing securityholders the right to subscribe for those securities not taken-up by other securityholders under the basic subscription privilege (on the same terms), however, this privilege is limited to each securityholder’s pro rata participation in the basic subscription privilege.
Stand-by guarantors, who agree to purchase any remaining securities offered in a rights offering that are not subscribed for by existing securityholders under the basic subscription privilege or additional subscription privilege, will not be subject to any more onerous restrictions on the resale of securities than any other securityholders under the new Rights Offering Exemption. Stand-by guarantors will be entitled to purchase securities pursuant to a prospectus-exempt rights offering as long as they are acquiring the securities as principal and not acting as an underwriter and acquiring such securities with a view to distribution.
The new Rights Offering Exemption includes the addition of statutory secondary market civil liability, which provides purchasers with a right of action for any misrepresentation in the Rights Offering Circular or other continuous disclosure documents relied upon in connection with the rights offering.
MINIMAL CONNECTION EXEMPTION
The amendments also provide a prospectus exemption for reporting issuers and non-reporting issuers who have a minimal connection to Canada (Minimal Connection Exemption). The Minimal Connection Exemption may be used so long as neither: (i) the number of beneficial securityholders of the relevant class that are resident in Canada, nor (ii) the number or amount of securities beneficially held by securityholders resident in Canada, exceeds 10 per cent of all securityholders or securities, as the case may be. The amendments removed the local jurisdiction component, which required that neither: (i) the number of securityholders that reside in a single province or territory, nor (ii) the number of securities held by securityholders that reside in a single province or territory, exceeds five per cent of all securityholders or securities, as the case may be.
Under the Minimal Connection Exemption, any materials sent to foreign securityholders for the distribution of rights must be concurrently filed and sent to each securityholder of the issuer who is resident in Canada.
NEW RIGHTS OFFERING EXEMPTION: IMPLICATIONS
By streamlining the regulatory review process and increasing the dilution amount to allow for larger offerings, prospectus-exempt rights offerings are expected to be seen as a more attractive option for issuers looking to raise capital. In particular, issuers with small market capitalization who previously reported that the dilution limit was too low to raise sufficient funds may now find prospectus-exempt rights offering worthwhile.
It is important to note that listed issuers will still have to comply with existing stock exchange rules governing rights offerings, which includes the Toronto Stock Exchange (TSX) and TSX Venture Exchange restrictions with respect to timing of record date and filings, pricing of the rights, insider participation and potential shareholder approval requirements. As a result, it is likely that in order to achieve the objective of increasing the attractiveness of rights offerings and the related reducing timing and costs will depend, in part, on the degree to which applicable stock exchange requirements are conformed to reflect the new Rights Offering Exemption regime. We understand that the TSX is currently examining whether to revise their rights offering related requirements or provide additional flexibility relating to its requirements given the removal of the CSA’s advance review and approval requirements in respect of Rights Offering Circulars.