Prospectus Exemption for Distributions to Existing Security Holders

Written By Harinder S. Basra, Juliamai L. Giffen and Tim F. Burns

On March 13, 2014, Canadian securities regulators in all jurisdictions except Ontario and Newfoundland and Labrador adopted a prospectus exemption for issuers listed on the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), and the Canadian Securities Exchange (CSE) that would, subject to certain conditions, allow issuers to raise money by distributing securities to their existing security holders.

Background

Prior to the adoption of this exemption, in order to conduct a distribution of its securities an issuer was required to file and receive a receipt for a prospectus or rely on a prospectus exemption. Generally, this meant that non-exempt purchasers (i.e., retail investors) who wanted to increase their position in an issuer could only acquire additional securities through the secondary market (i.e., a stock exchange) at the market price. This put retail investors at a disadvantage as they were required to pay ancillary transaction costs (such as brokerage fees) and were deprived of favourable terms typically available in private placements to exempt investors. As a result, retail investors had limited opportunity to invest directly in issuers, and issuers were denied a potential source of capital.

In response to the foregoing concerns, on November 21, 2013, the participating jurisdictions published a proposed exemption from the prospectus requirement in Multilateral CSA Notice 45-312 - Proposed Prospectus Exemption for Distributions to Existing Security Holders and sought comment from the public.

Changes to Proposed Exemption in Response to Comments

During the comment period, the Canadian Securities Administrators received 241 comment letters on the proposed exemption from a wide range of market participants, including issuers, registrants, investors, law firms, and advocacy groups. In response to those comments, certain changes to the exemption were made, including:

• expanding the exemption to include equity issuers listed on the TSX and the CSE;
• specifying the record date for eligibility to acquire securities under the exemption be at least one day prior to the day that an issuer issues the offering news release;
• adding a condition that the issuer make the offer available to all existing holders of the security to be distributed; and
• requiring issuers to describe in the offering news release how they intend to allocate oversubscriptions.

Purpose of the Exemption

The regulators believe the exemption will facilitate capital raising for listed issuers and foster participation of retail investors in private placements, while maintaining appropriate investor protection.

The Exemption

The exemption will be available to an issuer whose equity securities are traded on the TSX, the TSXV and the CSE. Any distribution of securities under the exemption must comply with certain conditions, including:

• the aggregate amount invested by the investor in any one issuer in the last 12 months under the exemption cannot be more than $15,000 (unless the investor has obtained advice regarding the suitability of the investment from a registered dealer);
• the investor must be provided with rights of action in the event of a misrepresentation in the issuer's continuous disclosure;
• the offering can consist only of a class of equity securities listed on the TSX, the TSXV or the CSE, or units consisting of the listed security and a warrant to acquire the listed security;
• the issuer must make the offering available to all existing holders of the security to be distributed;
• the issuer must have filed all timely and periodic disclosure documents as required under applicable securities laws;
• the issuer must issue a news release disclosing the proposed offering, including details of the use of proceeds;
• each investor must confirm in writing to the issuer that, as at the record date, they held the type of listed security offered under the exemption; and
• if an issuer voluntarily provides an offering document, even though not required, the issuer must file the offering document with the securities regulatory authority and an investor will have certain rights of action in the event of a misrepresentation in it.

Securities issued under the exemption will be subject to a four-month hold period pursuant to applicable securities laws, which is consistent with most other prospectus exemptions.

Proposed Prospectus Exemptions in Ontario

The Ontario Securities Commission announced on December 4, 2013, that it would publish for comment four new capital-raising prospectus exemptions in the first quarter of 2014, including a proposed prospectus exemption for distributions to existing security holders. It intends to publish the proposed prospectus exemptions on or around March 20, 2014.