Prospectus Exemption for Distributions to Existing Security Holders – A new tool for reporting issuers to raise equity
On March 13, 2014, the securities regulatory authorities in British Colombia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut published a prospectus exemption which will allow issuers listed on the TSX Venture Exchange (TSXV), the Toronto Stock Exchange (TSX) or the Canadian Securities Exchange (CSE) to raise money through the issuance of securities to their existing security holders in a manner that is expected to simplify the fund raising process.
It must be noted that the Ontario Securities Commission has elected not to join in that initiative at this time as it is currently considering new capital raising prospectus exemptions, including a similar prospectus exemption, which are expected to be published in the near term.
This initiative came about following the efforts of the TSXV to allow issuers listed on that exchange to have an easier access to financing in a cost effective manner. The initial 2013 proposal by the securities regulatory authorities was limited to issuers listed on the TSXV but the instrument, as enacted, was extended to benefit issuers listed on the TSX or the CSE as well.
This exemption will be available to the security holders of an issuer residing in a jurisdiction where the exemption is available and the offering will be commenced through the issuance of an offering press release providing reasonable details of the proposed distribution and use of proceeds, including the minimum and maximum amount of securities to be distributed; the description of the principal purposes for the use of proceeds assuming both the minimum and the maximum offering and what will be the allocation of securities offered if subscriptions are received in excess of the maximum amount proposed to be distributed. The description of the use of proceeds will likely be similar to what is commonly found in prospectus offering providing for a minimum amount and maximum amount of funds to be raised.
This exemption will allow existing investors of an issuer to tag along another offering conducted on a private placement basis of that issuer, and using the documents prepared for same.
There are no requirement to deliver offering material to the security holders interested to participate in the offering; however if such a document is prepared, it must be filed with the regulatory authorities on the same day that it is provided to a participant in an offering using this exemption.
It is however expected, as per the instrument, that the parties will enter into a subscription agreement pursuant to which the investors will benefit from a representation that the issuer documents and core documents, as these terms are defined for the secondary marked liability regime, do not contain a misrepresentation as well as on the absence of material fact or material change which have not been disclosed, thereby benefiting from secondary market liability regime indemnification.
This new regime provides that an investor can only invest up to a maximum of $15,000 per issuer under this exemption in any 12 month period unless the issuer has obtained a suitability advice from a registered investment dealer. In addition, as in any private placement, the securities distributed would be subject to a four month hold period under NI 45-102.
It is yet to be seen how this exemption will interact with the exemption to be proposed by the Ontario Securities Commission for similar offerings and if issuers will elect to use it on a standalone basis or, as an additional tool to raise funds in the context of an already planned private placement which would be extended to existing security holders.
This initiative is likely appealing to those investors which would not otherwise benefit, such as retail investors, from the other prospectus exemptions existing under National Instrument 45-106.
This exemption is effective as of March 14, 2013.
Canadian Securities Exchange National Instrument 45-106 NI 45-102 Ontario Securities Commission prospectus exemption Toronto Stock Exchange TSX Venture Exchange TSXV