Proposed listed issuer prospectus exemption

The Canadian Securities Administrators (CSA) have proposed a new prospectus exemption for issuers listed on a Canadian stock exchange wishing to raise equity capital (the Listed Issuer Financing Exemption). The exemption will take effect by amendment of National Instrument 45-106 Prospectus Exemptions and is part of the CSA’s ongoing efforts to reduce the regulatory burden for non-investment fund reporting issuers, including providing efficient means for issuers to raise capital while maintaining investor protection. This new exemption will not require preparing a short-form prospectus, thereby reducing time and costs, and will be of particular interest to smaller issuers looking for an alternative offering model. The Listed Issuer Financing Exemption is focused on a reporting issuer’s continuous disclosure record. Comments on the proposed exemption should be submitted by October 26, 2021.

Conditions of exemption

The Listed Issuer Financing Exemption proposes a more efficient method for smaller listed issuers to raise equity capital. Public commentary received and the CSA’s research indicated that the cost of the current short-form prospectus system can be prohibitive and dealers have less interest in smaller offerings. The Listed Issuer Financing Exemption is aimed at reducing issuer costs, facilitating retail investor participation, providing investors with better and more current disclosure than in a private placement and providing incentive for issuers to access public markets.  

To rely on the exemption, an issuer:

• must be listed on a Canadian stock exchange recognized by Canadian securities regulators and have been a reporting issuer for 12 months immediately prior to announcing the transaction in at least one Canadian jurisdiction;
• must have an up to date continuous disclosure record that will form the basis of the exemption;
• must have active business operations or its principal asset not be cash (or an equivalent) or its exchange listing; and
• will need to prepare a short offering document that will be considered a “core” document under the secondary market civil liability regime.

In addition, the exemption places the following limitations on the amounts that may be raised:

• the amount raised under the distribution, combined with other distributions made under this exemption during the 12-month period immediately before announcing the transaction, will not exceed the greater of $5 million or 10% of the issuer’s market capitalization to a maximum of $10 million; and
• the distributions of securities made under this exemption during the 12-month period will not result in more than 100% shareholder dilution or, in the case of debt, 100% of the principal amount.

Use of proceeds

The proceeds of funds raised under the Listed Issuer Financing Exemption may not be used for a significant acquisition or restructuring transaction that would require additional financial statements under the prospectus rules or for any other transaction that requires approval of any security holder.

Type of securities

Securities distributed under the exemption must be a listed equity security, a unit consisting of a listed equity security and a warrant, or a security convertible into a listed equity security or a unit consisting of a listed equity security and a warrant. The CSA is of the view that listed equity securities are easier for investors to understand and such securities have a market valuation. The exemption may be used for money raised in a subscription receipt transaction, provided shareholder approval of the transaction is not required. The CSA has solicited public comments as to whether convertible debt should be included as an equity security as currently drafted.  

Underwriter

To rely upon the Listed Issuer Financing Exemption, there is no requirement for a registrant or underwriter to be retained in connection with the offering. Investment dealers and exempt market dealers that are involved will be subject to their registration requirements. For example, dealers placing the stock with their clients will need to satisfy their client obligations in order to ensure the investment is suitable (KYC / KYP requirements).

The offering document and reporting obligation 

The issuer must announce the offering by press release before soliciting an offer to purchase the securities. The issuer must state that the offering document is accessible on SEDAR+ and on the issuer’s website.

A listed issuer must prepare a Listed Issuer Financing Document in the form prescribed by NI 45-106. The CSA does not expect it to be longer than a few pages. The offering document will need to include the following information in a Q and A format (and in plain language or, in certain instances, as prescribed):

• the securities offered and the conditions/limitations of the offering;
• that the offering document has not been reviewed by any securities regulator; 
• certification that both the financing document and 12-month continuous disclosure record contain no misrepresentations;
• a summary description of the business, recent developments, material facts and business objectives and milestones;
• a detailed breakdown of the use of the financing proceeds for distribution;
• a description of the disclosure of the use of the proceeds from any financing in the prior 12 months and variances from such disclosure;
• the involvement of dealers or finders and their fees, if applicable and 
• a description of statutory rights.

The financing document must be filed on SEDAR+ and posted on an issuer’s website before soliciting a purchaser. It must also be filed with the relevant securities regulators before soliciting a purchase and no later than three business days after the date of the form. The document (together with the continuous disclosure documents) must disclose all material facts about the issuer and its securities and must not contain a misrepresentation. It must be in French or French and English for use in Quebec. The distribution must end no later than the 45^th day after issuing the news release.

To allow CSA members to collect data on the offerings, a Form 45-106 F1: Report of Exempt Distributions must be filed within 10 days of the distribution of securities. However, detailed confidential information on the purchasers is not required (Schedule 1).

Freely tradeable securities

Equity securities issued in reliance on the exemption will be freely tradeable but subject to a seasoning period that will be satisfied by the issuer being a reporting issuer in good standing.  

Liability of issuers and others

Purchasers under the exemption will have the same rights as purchasers in the secondary market regarding misrepresentations contained in the short offering document and 12-month continuous disclosure record. In addition, purchasers under the exemption will also have a right to rescind the purchase within a period of 180 days from purchase.

Comments

The CSA has specifically requested comments on the following topics, among others:

• the appropriateness of the financial thresholds described above under Conditions of Exemption;
• potential further relaxation of Form 45-106 F1 and consideration of alternative reporting methods applicable to distributions under the new exemption; 
• the possibility of repealing other exemptions in light of the new exemption; and
• whether the proposed secondary market liability imposes sufficient incentive to provide adequate disclosure or should full prospectus liability be imposed.

The full text of the amendments is available here.