Written by John Piasta, James Beeby, Luke Johnson and Tajinder Rathor
On May 9, 2019, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 44-102 – Shelf Distributions (NI 44-102) and Companion Policy 44-102CP Shelf Distributions (see CSA Notice and Request for Comment from May 9, 2019). The proposed amendments would revise the rules applicable to at-the-market distributions (ATM Distributions) in Canada and would eliminate the need to obtain exemptive relief.
What Is an ATM Distribution? And Why the Need for Change?
An ATM Distribution is a distribution of securities by an issuer under a base shelf prospectus through the facilities of one or more public markets using a registered investment dealer acting as an agent. ATM Distributions have become common in the United States as issuers seek alternatives to traditional capital raising methods, which are typically more costly and less flexible. In Canada, the use of ATM Distributions has been less common. Industry participants have observed that the lack of ATM Distributions in Canada may be due to restrictions and obligations imposed by the current regulatory requirements.
Current Distribution Requirements
Part 9 of NI 44-102 contains certain requirements applicable to an ATM Distribution. However, NI 44-102 does not address certain prospectus-related requirements (i.e., delivery requirements, form of certificates, rescission language, etc.). Accordingly, issuers are also required to obtain exemptive relief (an Exemption Order) if they wish to conduct ATM Distributions in Canada. Although such Exemption Orders are routinely issued by the securities regulatory authorities in Canada, obtaining an Exemption Order is still a time consuming and costly process for issuers.
NI 44-102 places an arbitrary ceiling on the amount that can be raised pursuant to a single ATM Distribution. Pursuant to NI 44-102, the market value of securities distributed under an ATM Distribution may not exceed 10 percent of the aggregate market value of the issuer's outstanding equity securities of the same class (the 10% Limit). If an issuer seeks to raise an amount greater than 10 percent of its market value, it would need to conduct multiple ATM Distributions.
Additionally, the Exemption Orders that are granted in connection with ATM Distributions typically contain certain limitations that issuers and underwriters must abide by. For example, Exemption Orders have historically capped the aggregate number of securities of the class being distributed that may be sold on a marketplace on any trading day at 25 percent of the daily trading volume.
These limitations, in addition to the need to obtain an Exemption Order, likely contribute to why ATM Distributions have historically been underutilized in Canada.
The Proposed Amendments
The CSA is proposing to reduce the regulatory burden on issuers wishing to conduct an ATM Distribution by implementing the proposed amendments, which include:
- an exemption for the underwriter from the requirement to deliver a prospectus to purchasers in a distribution of securities; and
- an exemption for the issuer and underwriter from certain prospectus form requirements, including an alternative statement of statutory rights and alternative certificate forms.
If adopted, these exemptions would eliminate the need for issuers to obtain an Exemption Order.
In addition, the proposed amendments contemplate two alternative approaches that may be adopted regarding the volume and liquidity requirements applicable to ATM Distributions:
Under the first option, issuers would be eligible to distribute securities under an ATM Distribution only if: (i) the aggregate number of securities of the class distributed on a stock exchange on any trading day does not exceed 25 percent of the trading volume of that class on all marketplaces on that day or (ii) the securities are "highly liquid securities", as defined in the proposed amendments.
Under the second option, neither a 25 percent cap nor the "highly liquid securities" requirement will be implemented and issuers would not be subject to a limit on the number of shares which could be distributed on a given trading day. Given that issuers are required to retain an investment dealer to conduct an ATM Distribution, the CSA feels that there will not be a negative impact on market activity. Issuers themselves are also inherently incentivized to not conduct ATM Distributions that have a negative impact on the market for their securities.
Regardless of which approach is ultimately implemented, the proposed amendments contemplate the removal of the 10% Limit.
The CSA is accepting comments from the public on the proposed amendments until August 7, 2019.
The Future of ATM Distributions in Canada
The proposed amendments are an overdue change to Canadian regulatory requirements, and if implemented, would result in faster and less costly access to capital for issuers.
The implementation of the proposed amendments and the accompanying reduction in the regulatory burden will help to align Canada's regulatory requirements with its U.S. counterpart and should therefore result in an increase in the frequency in the use of ATM Distributions in Canada.
Please contact any member of our Corporate Finance practice group for further information.