Written by Nick Fader and Matt Olson
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). A draft version of the Exemption was published on April 16, 2015. We discussed the draft in our April 29, 2015, client update: Securities Regulators in British Columbia, New Brunswick and Saskatchewan Propose Prospectus Exemption for Certain Distributions through an Investment Dealer.
The Exemption is one of several recent prospectus exemptions introduced by securities regulators to facilitate capital raising by Canadian issuers. Those recent prospectus exemptions include: (i) the exemption for distributions to existing security holders; (ii) the crowdfunding exemption; and (iii) the simplified rights offering exemption. Additional information concerning those prospectus exemptions is included in the following Bennett Jones client updates: Prospectus Exemption for Distributions to Existing Security Holders, Alberta Securities Commission and Nunavut Securities Office Publish Proposed Start-up Business Exemption, and Simplified Rights Offering Rules Announced By Canadian Securities Administrators.
One goal of the Exemption is to promote greater retail participation in private placements. Many retail investors have historically been shut out of attractive private placement opportunities because they did not qualify as accredited investors under applicable securities laws. (Accredited investors have been estimated to represent roughly four percent of the Canadian population.) The only other prospectus exemption that facilitates widespread access to private placements on the part of non-accredited retail investors is the so-called "offering memorandum" exemption; however, use of that exemption is premised on the delivery of an offering document by the issuer and issuers generally forego the expense and delays associated with the preparation of an offering memorandum in cases where the offering can readily be marketed to accredited investors (without the need for an offering document).
Conditions to the use of the Exemption
An issuer may distribute securities in reliance on the Exemption (in one or more of the participating jurisdictions), if the following conditions are satisfied:
- the securities are issued by the issuer itself (the exemption does not support secondary trading), and each purchaser acquires the securities as principal;
- the issuer is a reporting issuer under securities legislation in force in at least one Canadian jurisdiction and has equity securities listed on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange or the Aequitas Neo Exchange Inc.;
- the issuer is current with respect to its continuous disclosure obligations under Canadian securities laws;
- the offering consists only of: (i) a listed security; (ii) a unit comprised of a listed security and a warrant to acquire another listed security; or (iii) another security convertible into a listed security at the security holder's sole discretion;
- the news release announcing the offering: (i) describes the distribution in reasonable detail, including the proposed use of proceeds; and (ii) includes a statement that there is no material fact or material change relating to the issuer that has not been generally disclosed;
- the investor obtains advice regarding the suitability of the investment from a registered investment dealer;
- in British Columbia, Saskatchewan, Manitoba and New Brunswick, the investor is provided with a contractual right of action that may be exercised if there is a misrepresentation in the issuer's continuous disclosure record, regardless of whether the investor relied on the misrepresentation in connection with his/her purchase of the securities (in Alberta, purchasers are afforded a statutory right of action under Part 17.01 of the Securities Act (Alberta)); and
- although an offering document is not required, if the issuer voluntarily provides one, an investor will have certain rights of action that may be exercised if the offering document contains a misrepresentation.
As well, the issuer is required to make certain representations regarding the accuracy of its continuous disclosure record in the subscription agreement it enters into with the purchaser.
Similar to most other capital raising prospectus exemptions, first trades of any securities issued under the Exemption will be subject to a four month hold period, and the issuer will be required to file an exempt distribution report within 10 days of closing.
Securities regulatory authorities have not created a corresponding exemption from the dealer registration requirement set out in securities legislation. However, the absence of an exemption from the dealer registration requirement will be irrelevant to many issuers – as a general rule, an issuer engaged in an active business that does not involve the sale of securities is not required to be registered as a dealer under securities legislation in force in Canada, as the issuer is not engaged in the business of trading in securities.
Will the Exemption be Used?
For the most part, we expect the Exemption will be used in the context of brokered private placements, as the requirement to obtain suitability advice 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.