By Mani Saggu and Virgil Hlus
The Canadian Securities Administrators (the “CSA”) approved a new prospectus exemption available to public companies listed on a Canadian stock exchange (the “New Exemption”). The New Exemption relies on the company’s continuous disclosure record, as supplemented with a short offering document, and allows a public company to distribute freely tradeable listed securities to the public.
The New Exemption allows public companies to issue freely tradable securities without filing a short form prospectus. This exemption is expected to benefit public companies, particularly venture companies, by providing a more cost and time efficient way to raise money. However, purchasers under this exemption would have two options for recourse in the event of a misrepresentation – rights of action under secondary market civil liability and a contractual right of rescission against the company. Moreover, under this exemption, public companies and in some jurisdictions, the executives signing the offering document and the company’s directors will be subject to statutory liability if the offering document contains a misrepresentation. As a result, management needs to be diligent in drafting and preparing the offering document to avoid any such liability.
The New Exemption will take effect on November 21, 2022 by an amendment to National Instrument 45-106 Prospectus Exemptions.
To rely on the New Exemption, the company must have:
- securities listed on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange or the Aequitas NEO Exchange;
- been a reporting issuer for at least 12 months in at least one jurisdiction in Canada;
- filed all timely and periodic disclosure documents as required under the continuous disclosure requirements; and
- active business operations.
The New Exemption is subject to the following key conditions:
1. News Release and Offering Document
Before soliciting an offer to purchase from a purchaser, the company must issue and file a news release announcing the offering and stating that a purchaser can access the offering document for the distribution under the company’s profile on SEDAR and on the company’s website, if the company has a website.
The distribution must be completed within 45 days after issuing the news release.
The company must prepare and file a short offering document using Form 45-106F19 Listed Issuer Financing Document (“Form 45-106F19”) containing the following:
- details about the offering;
- the required statement as set out Form 45-106F19;
- summary description of the business, recent developments, material facts and business objectives and milestones;
- the company’s financial condition;
- how proceeds will be used;
- how proceeds from any other offering in the previous 12 months were used;
- involvement of dealers or finders and their fees, if applicable; and
- the purchasers’ statutory rights.
The New Exemption is not available if the company is planning to use the proceeds 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.
The company is required to report use of the New Exemption within 10 days after the distribution by filing a Form 45-106F1 Report of Exempt Distribution.
2. Types of Securities
Securities offering under the New Exemption must be listed equity securities and units consisting of listed equity securities and warrants convertible into listed equity securities.
3. Total Dollar Amount
Companies will be limited to raising the greater of the following:
(i) $5,000,000; and (ii) 10% of the company`s market capitalization, to a maximum total dollar amount of $10,000,000.
4. Statutory Liability
Since the CSA will not be reviewing the offering documents, the CSA imposed statutory liability on the company. The offering document would be a core document, forming part of the company’s continuous disclosure record for the purposes of secondary market civil liability.
5. Underwriter and Exempt Market Dealer
While investment dealers and exempt market dealers may participate, there is no requirement for any investment dealer to be involved.