The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 45-106 Prospectus Exemptions that would introduce a new prospectus exemption for reporting issuers that are listed on a Canadian stock exchange.

The CSA's proposed prospectus exemption (the Listed Issuer Financing Exemption) relies on the issuer's continuous disclosure record, which would be supplemented with a short offering document, and would allow issuers to distribute freely tradeable listed equity securities to the public. No hold period would apply to the securities distributed under the Listed Issuer Financing Exemption. However, issuers relying on the Listed Issuer Financing Exemption would be subject to limits on the maximum that may be raised in any 12-month period and would be required to file a post-trade report within 10 days of the distribution. The proposed exemption aims to provide a more efficient method of raising capital, particularly for smaller issuers.

Qualification Criteria

In order to qualify to use the Listed Issuer Financing Exemption, an issuer would be required to:

  • have securities listed on a recognized exchange in Canada;
  • have been a reporting issuer for at least 12 months in at least one jurisdiction in Canada;
  • have filed all timely and periodic disclosure documents as required under the continuous disclosure requirements in Canadian securities legislation; and
  • have active business operations.

The Offering Document

Issuer's relying on the Listed Issuer Financing Exemption would be required to prepare and file an offering document in a prescribed form. The required offering document would include information about the issuer highlighting:

  • any new developments in the issuer's business;
  • the issuer's financial condition;
  • how proceeds from the current offering will be used; and
  • how proceeds from any offering in the past 12 months were used.

The offering document would not be reviewed by the CSA but would be a "core document" under Canadian securities legislation and would become a part of the issuer's continuous disclosure record for purposes of secondary market civil liability. As a result, in the event of a misrepresentation in the offering document or in the issuer's continuous disclosure record for a prescribed period, purchasers under the Listed Issuer Financing Exemption would have the same rights of action under secondary market civil liability as purchasers on the secondary market. Purchasers under the exemption would also have a contractual right of rescission against the issuer for a period of 180 days following the distribution in the event of a misrepresentation.

Offering Parameters

Notably, securities distributed in reliance on the Listed Issuer Financing Exemption would not be subject to any hold period and would immediately be freely tradeable. The CSA has indicated that a hold period is not necessary as the issuer must disclose all material facts at the time of the offering.

An issuer would only be permitted to raise the greater of $5 million or 10% of the issuer's listed equity securities (to a maximum of $10 million) in any 12 month period in reliance on the Listed Issuer Financing Exemption, provided that the distributions in such period do not result in an increase of more than 100% of the number, or, in the case of debt, the principal amount, of the issuers issued and outstanding securities, as of the date that is 12 months before the transaction is announced. Only listed equity securities or securities convertible into equity securities could be issued. However, subscription receipts could be issued if not used in connection with a significant acquisition, restructuring transaction or other type of transaction that would require securityholder approval.

The Listed Issuer Financing Exemption would not be available if the issuer is planning to use the proceeds of the offering for a significant acquisition or a restructuring transaction, such that the issuer would be required to provide additional financial statements under the prospectus rules.

The issuer would be required to report the use of exemption by filing a Form 45-106F1 Report of Exempt Distribution. However, Schedule 1 – Confidential Purchaser Information would not need to be completed. Additionally, the securities distributed would not be subject to a hold period and an underwriter would not be required to be involved in the distribution.

Background

The proposal for the Listed Issuer Financing Exemption stems from the CSA's publication in March 2018 of CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, following which stakeholders supported revisiting the merits of an alternative prospectus offering model for reporting issuers. Feedback received by the CSA during the consultation process included that the costs of completing a short form prospectus offering have been a barrier for issuers who want to raise small amounts of capital.

A similar sentiment was noted in the Capital Markets Modernization Taskforce Final Report published in January 2021 (the Final Report) where it was noted that the "high costs associated with preparing an filing a prospectus can prove to be a barrier to capital raising for smaller issuers". Following the Ontario Capital Markets Modernization Taskforce's consultation process, the Final Report recommended the adoption of an alternative offering model prospectus exemption for all reporting issuers, with securities listed on an exchange that are in full compliance with their continuous disclosure requirements to allow them to offer freely tradeable securities to the public. The proposed conditions to the Listed Issuer Financing Exemption are generally similar to those proposed by the Taskforce.

The CSA is accepting comments on the Listed Issuer Financing Exemption until October 26, 2021. For further information, please see CSA Notice and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus Exemptions to introduce the Listed Issuer Financing Exemption.

Co author by Stephanie Gill, Summer Student

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