Photo of Joe BrennanBy Joe BrennanSeptember 30 2015
Business Law

CSA Adopts a More Accessible Rights Offering Prospectus Exemption

Rights offerings can be one of the fairer ways for issuers to raise money as they generally provide a better opportunity than other types of financings for retail investors to participate in a company’s financings and to avoid dilution of their investment. 

However, Canadian reporting issuers have historically completed very few rights offerings as, under the current rules, they were too time-consuming and costly. With the objective of increasing the appeal of rights offerings as a financing method, the Canadian securities commissions have announced that they are adopting a streamlined rights offering regime that should make it much easier, faster and cheaper for Canadian reporting issuers to do rights offerings. Note that the new exemption will not be available for non-reporting issuers or investment funds. 

The new rules are expected to become effective on December 8, 2015.   Below is a snap shot of these new rules.

Rights Offering DocumentsBefore the commencement of the exercise period for the rights, the issuer must file on SEDAR and send to all security holders, resident in Canada, of the class of securities to be issued upon exercise of the rights, a Rights Offering Notice. This is a two-page document disclosing the basic terms of the rights offering and how to access the Rights Offering Circular electronically on SEDAR. Concurrently with filing the Rights Offering Notice, the issuer files on SEDAR a Rights Offering Circular. This document is presented in a Q&A format answering certain prescribed questions, including the use of proceeds, procedural matters for exercising rights, interests of underwriters, insiders, and stand-by guarantors and material information regarding the issuer not previously disclosed. Otherwise, business information and financial statements will not be required in the Rights Offering Circular. The Rights Offering Circular is not required to be mailed to security holders.

LanguageIn Québec, the Rights Offering Notice and the Rights Offering Circular must be prepared (i) in French or (ii) in French and English. In all other Canadian provinces, it may be prepared in English only. And since the basic subscription privilege must be offered to all security holders of the issuer, resident in Canada, of the class of securities to be distributed upon the exercise of the rights, if the issuer has any security holders of that class of securities resident in Quebec the rights offering documents must be prepared in French as well.

Regulatory ReviewThere will be no advance review of the rights offering documents by the Canadian securities commissions. However, at present, the rights offering documents must still be pre-cleared with the TSX and the rights offering must receive TSX final acceptance at least seven trading days prior to commencing a rights offering. A preliminary discussion with TSX is recommended to a listed issuer proposing to offer rights to its participating security holders.

Dilution LimitThe maximum dilution allowed for any issuer under this new rights offering prospectus exemption is 100% in any 12 month period.

PricingUnder the new rights offering prospectus exemption rule, the subscription price for a security to be issued upon the exercise of a right must be lower than the market price of the security on the day the rights offering notice is filed. However, the TSX expects the securities to be offered at a "significant discount" to market price at the time of pricing of the offering, which is expected to be at the time of filing of the (final) circular. A significant discount would be equal to at least the maximum discount to market price allowed for private placements as set forth in the TSX Company Manual. This is a stricter requirement than the "below market" rule noted above.

Basic Subscription PrivilegeThe basic subscription privilege must be made available on a pro rata basis to all of the security holders of the issuer, resident in Canada, of the class of securities to be distributed upon the exercise of the rights.

Additional Subscription Privilege (optional)The issuer may give security holders the right to subscribe for securities not taken-up by other security holders under the basic subscription privileges, on the same terms. But this privilege is limited to each security holder's pro rata participation in the basic offering.

Stand-by Commitment (optional):The issuer may arrange for a stand-by commitment, by a guarantor with sufficient financial resources, to acquire the securities not otherwise subscribed for by existing security holders under the basic subscription privilege or the additional subscription privilege, provided it first grants additional subscription privileges to its existing security holders. A stand-by guarantor must purchase rights as principal and not as an underwriter or with a view to distribution.

Exercise PeriodThe period for exercising rights under the rights offering must not be less than 21 days and not more than 90 days.

ClosingThe issuer must issue a closing press release containing prescribed information relating to the offering, including the gross proceeds, the number of securities distributed and confirmation that the securities distributed were issued under the basic subscription privilege, the additional subscription privilege and/or a stand-by commitment.

Resale RestrictionsGenerally speaking, there are no resale restrictions in Canada on the rights, or on the securities issuable on exercise of the rights provided that the issuer has been a reporting issuer in at least one Canadian jurisdiction for at least 4 months prior to the commencement of the rights offering.

Cross Border Rights OfferingsIf the issuer is not already an SEC registrant, in order for the rights offering to be extended to an issuer’s U.S. security holders, without SEC review and without triggering ongoing SEC reporting obligation, the issuer must qualify as a "foreign private issuer" under SEC rules and no more than 10% of its securities may be held by U.S. residents or, if the 10% threshold is exceeded, the issuer must have been listed on the TSX or TSX-V for at least one year and have a three-year Canadian reporting history. In that circumstance, the underlying securities are freely tradeable in the U.S. but the rights are not and may only be sold outside the U.S. (including over the TSX or TSX-V) in compliance with the SEC’s Regulation S. However, notwithstanding the foregoing, for issuers that exceed the 10% limit SEC rules do not contemplate the notice-and-access method for delivering a circular so these issuers may need to seek SEC relief in order to send U.S. security holders only the brief offering notice and not the full offering circular.

Shareholder ApprovalIf a third party (a "backstop" or “stand-by guarantor”) has agreed to subscribe for securities which are not otherwise subscribed for under the rights offering, and there is not a significant discount, TSX will require security holder approval if the rights offering could result in a “material effect on control” of the listed issuer. The TSX Company Manual says that "materially affect control" means the ability of any security holder or combination of security holders acting together to influence the outcome of a vote of security holders, including the ability to block significant transactions. Such an ability will be affected by the circumstances of a particular case, including the presence or absence of other large security holdings, the pattern of voting behaviour by other holders at previous security holder meetings and the distribution of the voting securities. A transaction that results, or could result, in a new holding of more than 20% of the voting securities by one security holder or combination of security holders acting together will be considered to materially affect control, unless the circumstances indicate otherwise. Transactions resulting in a new holding of less than 20% of the voting securities may also materially affect control, depending on the circumstances outlined above.

Invitation for Discussion: If you would like to discuss this or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.

Disclaimer: Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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