Canadian Securities Regulators Propose Significant Changes to the Rights Offering Regime

Written By Will Osler, Sandra L. Malcolm and Donald J.M. Sullivan

The Canadian Securities Administrators, or CSA, have published for comment proposed rule changes which would create a streamlined prospectus exemption for rights offerings conducted by reporting issuers other than investment funds (the Proposed Exemption). The Proposed Exemption is intended to benefit reporting issuers by removing the current regulatory review process, which will reduce the time and associated costs of conducting a rights offering.

Background

Under the current rights offering regime in Canada, reporting issuers who wish to conduct a prospectus-exempt rights offering must use the prospectus exemption (the Current Exemption) available under section 2.1 of National Instrument 45-106 Prospectus and Registration Exemptions. Under the Current Exemption, a rights offering circular must also be filed and reviewed by the applicable securities commission and the reporting issuer may not issue more than 25 percent of its securities in any 12-month period. Research conducted by the CSA over the past year found that the Current Exemption is used only by a few reporting issuers as the overall time period to conduct a prospectus-exempt rights offering is much longer than offerings for other prospectus exemptions. The CSA also found that the 25-percent limit restricts the ability of reporting issuers with small market capitalization to raise sufficient funds to make a rights offering worthwhile.

Proposed Exemption

Notice: In order to use the Proposed Exemption, issuers will have to file and send to security holders a notice prior to the commencement of the exercise period of the rights. The notice will contain basic disclosure about the offering and inform security holders on how to access the rights offering circular electronically.

Circular: Concurrently with the filing and sending of the notice, issuers will be required to prepare and file a rights offering circular which will be in a question and answer format. The circular will contain information about the rights offering, the use of funds available and the financial condition of the issuer. Issuers will be required to certify that the circular contains no misrepresentations.

No Review of Notice or Circular: Under the Proposed Exemption the CSA will no longer review the notice or the circular prior to use by the issuer. However, for a period of two years from the adoption of the Proposed Exemption, the CSA intends to conduct reviews of circulars, in most cases on a post-distribution basis, to understand how issuers are using the Proposed Exemption and to ensure that issuers are complying with the conditions of the Proposed Exemption.

Increased Dilution Limit: The CSA proposes to raise the dilution limit from 25 percent to 100 percent. An issuer would therefore be able to issue up to 100 percent of its outstanding securities in any 12-month period.

Pricing: For reporting issuers that are listed on a stock exchange, the CSA proposes that the subscription price for a security issuable on exercise of a right must be lower than the market price at the time of filing the notice, which is intended to encourage more participation from retail security holders. For reporting issuers not listed on a marketplace, the subscription price for a security issuable on exercise of a right must be lower than fair value at the time of filing of the notice.

Closing News Release: Under the Proposed Exemption, an issuer must file a closing news release which contains prescribed information regarding the rights offering, such as the gross proceeds of the rights offering and amounts of securities distributed under each of the basic subscription privilege, plus details of any additional subscription privilege and stand-by commitment.

Investor Protections

The CSA proposes that an issuer must make the basic subscription privilege available on a pro rata basis to each security holder of the class of securities to be distributed on exercise of the rights. In addition, statutory civil liability for secondary market disclosure provisions apply to the acquisition of securities under the Proposed Exemption, which would provide investors relying on the circular with rights of action in respect of a misrepresentation in an issuer's continuous disclosure, including the circular.

No Exemption for Non-Reporting Issuers

As part of the proposed amendments, the CSA proposes to repeal the Current Exemption under section 2.1 of National Instrument 45-106 in addition to National Instrument 45-101 Rights Offerings and its related companion policy. As a result, there would no longer be a prospectus exemption for rights offerings by non-reporting issuers. Non-reporting issuers rarely use the rights offering exemption and the CSA believes that there is insufficient disclosure of the non-reporting issuer and its business in a rights offering circular for an investor to make an informed investment decision and to justify a prospectus exemption.

Stand-by Commitment

The CSA proposes to introduce a prospectus exemption for securities issued to a stand-by guarantor as part of a distribution under the Proposed Exemption, where the stand-by guarantor acquires the securities as principal. If the stand-by guarantor is a security holder of the issuer as at the date of the notice and is not a registered dealer, the securities acquired pursuant to the exemption would generally not be subject to a hold period on resale. If the stand-by guarantor is not a security holder of the issuer as at the date of the notice or is a registered dealer, the securities acquired pursuant to the exemption would be subject to a four-month hold period.

Next Steps

The CSA's comment period closes on February 25, 2015, and Bennett Jones LLP would be pleased to assist clients in submitting their comments on the Proposed Exemption.