Bennett Jones
Securities regulatory authorities in each of British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick recently announced the creation of a new prospectus exemption that will allow certain issuers to distribute securities to investors who have obtained advice about the suitability of the investment from a registered investment dealer (the Exemption).
For the most part, we expect the Exemption will be used in the context of brokered private placements, as one of the requirements of the Exemption is to obtain suitability advice from a registered investment dealer, which will necessitate due diligence on the part of the investment dealer providing that advice. The expenses associated with the due diligence hurdle will likely only be incurred by investment dealers who form part of a selling group and who are entitled to receive a commission on sales of securities in connection with the private placement.
Although a number of market participants have expressed enthusiasm for certain prospectus exemptions that have recently become available to Canadian issuers (such as the exemption permitting distributions of securities to existing security holders and the simplified rights offering exemption), those exemptions (some of which, admittedly, are very recent) do not appear to have been widely relied upon since their creation, and the accredited investor exemption continues to be the preferred exemption for capital raising purposes. We expect the Exemption will get more traction with issuers than a number of the recently introduced prospectus exemptions due to the ease with which it may be used “ on its face, it appears to be a relatively user-friendly exemption that could, for example, be bolted-on to an accredited investor offering without a significant increase in transaction costs and without impairment of the offering timeline. Having undertaken customary due diligence on the issuer and the offering, it should be possible for a registered investment dealer engaged by the issuer (as agent) to cost effectively scale the offering to include clients who do not qualify as accredited investors. Additional details, including the conditions to the use of the Exemption, are included in our recent client update: New Prospectus Exemption for Investors that Receive Suitability Advice from a Registered Investment Dealer.