On April 20, 2017, the Canadian Securities Administrators (“CSA”) published CSA Staff Notice 45-323 Update on Use of the Rights Offering Exemption in National Instrument 45-106 Prospectus Exemptions which reviewed the use of the revised right offering exemption which was effective December 8, 2015 (the “Revised Offering Exemption”). The CSA Staff Notice also provides guidance based on CSA reviews of the use of the exemption.
According to the CSA Staff Notice, the revised rights offering exemption was a way of addressing concerns that issuers had with the previous rights offering exemption because of the associated time and costs of that exemption. The Revised Rights Offering Exemption was designed to make prospectus-exempt rights offerings more attractive to reporting issuers. Key elements of the Revised Offering Exemption include:
- a new rights offering notice that reporting issuers must file and send to security holders informing them how to access the rights offering circular electronically;
- a new form of simplified rights offering circular in a question and answer format intended to be easier to prepare and more straightforward for investors to understand – it has to be filed but not sent to security holders;
- a dilution limit of 100%, increased from 25%, and;
- the addition of statutory secondary market liability.
The CSA reviewed the use of the exemption in certain jurisdictions. The review showed that use of prospectus-exempt rights offerings increased significantly. Prior to adoption, there were approximately 13 prospectus-exempt rights offerings by Canadian reporting issuers each year. As of December 31, 2016, 30 issuers had used the exemption to raise $247.6 million. While the majority of issuers that used the exemption were venture issuers, the exemption was also used by issuers listed on the TSX – 23 venture issuers used the exemption as compared to seven TSX-listed issuers. Additionally, the time to conduct a rights offering has been reduced significantly, taking on average 38 days from filing to closing.
The CSA found that while the 30 offerings met the requirements of the exemption, there were a number of areas where compliance and disclosure could be improved:
- stand-by commitments – the CSA noted a weakness in the disclosure regarding the relationship between the issuer and the stand-by guarantors;
- use of available funds – CSA noted reoccurring deficiencies in the disclosure where available funds are insufficient to cover short-term liquidity requirements and overhead expenses; and
- closing news release – the CSA noted that issuers did not always include the required information.
CSA Staff Notice 45-323 is available for download from the websites of participating jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
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