Written By William Osler KC, Abbas Ali Khan, Kim Lawton, Bosa Kosoric and Joshua Koop
The Canadian Securities Administrators (CSA) recently announced an amendment to National Instrument 45-106 Prospectus Exemptions (NI 45-106) that introduces a new prospectus exemption (the Listed Issuer Financing Exemption) for reporting issuers. As of November 21, 2022, the Listed Issuer Financing Exemption will allow eligible issuers to bypass prospectus requirements to raise capital more efficiently.
Who Can Use This Exemption?
A reporting issuer who wishes to use the exemption for an offering of securities must satisfy several requirements, including the following:
- it must be a reporting issuer in at least one Canadian jurisdiction for the 12 months immediately preceding its announcement of the offering;
- it must have equity securities listed on an exchange recognized by securities regulatory authorities in Canada;
- it must not have ceased operations or held cash or cash equivalents as its primary asset within the previous 12 months (which excludes capital pool companies, special purpose acquisition companies and growth acquisition corporations);
- it must not be an investment fund; and
- it must be up-to-date on its continuous disclosure obligations and must reasonably expect to have sufficient funds to meet its business objectives and liquidity requirements for the 12 months following the distribution.
What Type of Distribution Can an Eligible Issuer Make?
An issuer who uses the Listed Issuer Financing Exemption is limited in the size, nature and purpose of a distribution. In any given 12-month period, the issuer can raise the greater of $5 million and 10 percent of the market value of its listed securities, to a maximum of $10 million. A distribution cannot increase the issuer's outstanding listed securities by more than 50 percent from 12 months prior to the distribution. The securities issued in reliance on the exemption must be either a listed equity security or a unit containing a listed equity security and a warrant convertible into a listed equity security. The issuer cannot use the funds from the offering for a significant acquisition (as defined in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102)), a restructuring or a transaction requiring securityholder approval.
What Must the Issuer Disclose and What Potential Liabilities Does an Issuer Incur?
Before soliciting any offers to purchase securities, an issuer must issue and file a news release that announces the offering and complete and file on SEDAR a Form 45-106F19 Listed Issuer Financing Document (the Form) no later than three business days after the date of the Form. The news release must include a statement directing prospective investors to the Form and advising them to read it before investing. The issuer must close its distribution within 45 days of issuing the news release.
Beyond filing the Form on SEDAR, the issuer must post it on its website if it has one. Among other things, the issuer must include in the Form details on its business, including all previously undisclosed material facts and its intention for the funds. If a material change occurs before the issuer completes the distribution, the issuer must cease the distribution until it meets certain disclosure obligations (including those contained in NI 51-102), files an amendment to the Form and issues a news release announcing the filing of the amended Form addressing the material change. The Form must indicate that no securities regulator reviewed it, warn prospective investors against investing unless they are willing to lose their entire investment and advise prospective investors to seek advice from a registered dealer.
The issuer is liable for any misrepresentations it makes in the Form. The Form includes a certificate from the issuer certifying that the Form, together with the issuer's continuous disclosure record for the last 12 months (or longer if the date of filing of the most recent annual financial statements was greater than 12 months), contains disclosure of all material facts and does not contain a misrepresentation. If there is a misrepresentation, investors can rescind their purchases. Alternatively, investors can seek damages against the issuer and, in some jurisdictions, other persons. Investors can seek either remedy regardless of whether they relied on the misrepresentation when purchasing the securities, and they must do so in a timely manner. For distributions in Québec, the Form must be prepared in French or French and English.
Currently, the Listed Issuer Financing Exemption conflicts with the TSX Venture Exchange's (TSXV's) rules on hold periods. While we understand the TSXV intends to amend its rules to align with the exemption, aiming to do so before November 21, 2022, in the event the amendments are made afterwards, issuers listed on the TSXV will need to comply with the existing requirements until those changes take effect.
Implications for Registrants
Investment dealers and exempt market dealers may participate in a financing using the Listed Issuer Financing Exemption, but there is no requirement for a dealer or underwriter to be involved. If an issuer chooses to engage a dealer in connection with the offering using the Listed Issuer Financing Exemption, then certain specified disclosure regarding dealer conflicts is required in the Form. It should also be noted that there is no corresponding exemption from the registration requirement for acts related to distributions under the exemption, so anyone in the business of trading in securities must be registered or avail themselves of an applicable registration exemption for any activities undertaken in connection with distributions under the exemption.
Small-to-medium-sized issuers stand to benefit the most from the Listed Issuer Financing Exemption as it opens a new avenue for raising a moderate amount of funds. The exemption balances the competing needs to raise money more cost-effectively and protect investors. While issuers must ensure the absence of any misrepresentations within the required announcements and forms, the exemption creates new opportunities for capital-intensive business growth and development.
Bennett Jones has extensive experience in corporate financing and securities law. If you have questions about the new exemption or your company's potential eligibility for this or other prospectus exemptions, please contact the authors.