Securities Regulators on the ‘Right’ Path to Rights Offerings
On November 27, 2014, the Canadian Securities Administrators (CSA) published proposed amendments to the rights offering regime that aim to make rights offerings more expedient and less costly by creating a streamlined prospectus exemption for reporting issuers (Proposed Exemption). The proposed amendments also aim to increase investor protection with the addition of civil liability for secondary market disclosure and the introduction of a more user-friendly form of rights offering circular document. Finally, the proposed amendments would also update requirements for prospectus-based rights offerings and would repeal the prospectus exemption for rights offerings by non-reporting issuers. This article highlights several of the proposed changes.
Proposed New Exemption for Rights Offerings by Reporting Issuers
The Key Changes
Currently, the key conditions of prospectus-exempt rights offerings are that a rights offering circular must be reviewed and approved by the CSA staff and no more than 25% of the reporting issuers’ securities may be issued under the exemption in any 12-month period. Under the Proposed Exemption, rights offering circulars would no longer require CSA review and approval, which should reduce the average length of time to complete an exempt rights offering by at least 40 days, and the dilution limit under the current rules would be increased from 25% to 100%.
There are certain limitations to the Proposed Exemption as well. For example, an exempt rights offering would have to be offered to all security holders of the class of securities to be distributed and the subscription pricing must be at a discount from market price. Finally, as a means of providing investor protection, the CSA has proposed that statutory secondary market civil liability apply to the acquisition of securities in a rights offering for misrepresentations in issuers’ continuous disclosure record documents, including a rights offering circular.
In order to conduct a rights offering under the Proposed Exemption, a reporting issuer must file and send to its security holders a one- to two-page basic disclosure notice, file a rights offering circular, and issue and file a closing news release. The circular is proposed to be in a question and answer format and would focus on information about the offering, the use of funds and the issuer’s financial condition. In contrast to the current regime, issuers would no longer be required to send copies of the circular to security holders, as long as the notice explains how to access the circular electronically, nor would they be required to include information about the issuer’s business in the circular itself.
Proposed Amendments for Rights Offerings Conducted by Way of Prospectus
Under the proposed new rights offering regime, a prospectus would be required in circumstances where an issuer does not satisfy the conditions necessary to rely on the Proposed Exemption (for example, the rights offering contemplates the issuance of more than 100% of the issuers’ securities in any 12-month period or is made available only to select holders of the class of securities to be distributed).
The only substantive amendments proposed for rights offerings conducted by way of a prospectus are the new discount pricing requirements, which would be the same as under the Proposed Exemption, as described above. The other amendments are structural, with the CSA proposing to move all the requirements relating to a prospectus rights offerings to the long form prospectus rule so that all requirements for prospectus offerings, generally, reside in the same instrument.
Proposed Exemption for Securities Distributed as Part of a Stand-by Commitment
Currently there is no specific exemption for the distribution of securities under a stand-by commitment if the stand-by guarantor is not already a security holder of the issuer. The CSA has proposed to introduce a prospectus exemption to stand-by guarantors that are not existing security holders but also intends to apply a four-month restricted resale period to the securities distributed to them.
Currently stand-by guarantors who are already security holders of the issuer are subject only to a seasoning period on the resale of securities acquired under a stand-by commitment. The CSA is also considering imposing a restricted four-month hold period on resale for stand-by guarantors who are security holders of the issuer, but only on the securities issued to the stand-by guarantor as part of the stand-by commitment.
Proposed Exemption for Issuers with a Minimal Connection to Canada
The CSA has also proposed a prospectus exemption for issuers with minimal connection to Canada, whereby an issuer would not require a prospectus for rights offerings in certain situations where the number of securities and beneficial holders in Canada and in the local jurisdiction is minimal. This exemption is substantially similar to the current exemption, except that an issuer will no longer be required to wait for a period of 10 days following notice of the rights offering to the securities regulators for confirmation that the regulators have no objection to the offering.
Next Steps and Ongoing Review
The notice and request for comments issued by the CSA on November 27, 2014 provides a 90-day comment period, inviting written comments on the proposed instrument no later than February 25, 2015. We encourage you to communicate to us any comments or concerns you may have with respect to the proposed amendments.
CSA exemption minimal connection to Canada prospectus exemption rights offerings rights offerings exemption stand-by commitment stand-by guarantor