Canadian securities regulators are proposing a new prospectus exemption that would streamline capital raising for companies listed on recognized Canadian stock exchanges. The proposed exemption would allow public companies to rely on their continuous disclosure record to provide relevant information to purchasers and, like a prospectus offering, would permit companies to issue freely tradeable securities to the public. This exemption would, if adopted, reduce regulatory and administrative burden and make public offerings more efficient and cost-effective.
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The proposed exemption would enable a Canadian public company to raise up to the greater of $5 million or 10% of its market capitalization through a simplified public offering process.
This would be a game-changing development for smaller public companies that currently face an onerous process to complete a prospectus offering for smaller amounts. Instead of preparing a full prospectus, companies would file a simplified offering document, resulting in significant savings on transaction costs while still benefiting from access to retail investors.
The proposal is based on feedback from stakeholders advocating an alternative to the prospectus model for public offerings of securities. Market data suggested that companies listed on the TSX Venture Exchange were far less likely to raise money by way of prospectus than by private placement, whereas TSX-listed companies tended to raise more frequently by prospectus. This correlates to the amount of capital raised, as only about 1 in 5 prospectus offerings raised less than $10 million.
The proposed exemption is an effort to provide companies with greater access to public markets for smaller offerings by reducing the strain of the process. It would alleviate the high cost and regulatory burden of the traditional public financing model, which is particularly relevant for companies that raise capital in smaller amounts.
For companies that would typically face the choice of raising money with a more limited investor pool and a hold period via private placement or incurring the cost of a prospectus offering, this proposal will have considerable appeal.
Perhaps the most notable component of the proposed exemption is the ability of a company to issue securities with no hold period. Since the simplified offering document, along with the company’s existing disclosure, would make public all material facts at the time of the offering, Canadian securities regulators deemed the hold period unnecessary.
Among the features of the proposal are the following:
- Companies can raise up to the greater of $5 million or 10% of market capitalization, with a maximum of $10 million raised or 100% dilution in any 12-month period.
- Companies may gain access to a broad investor pool.
- Securities can be issued with no hold period.
- There is no requirement for an underwriter to be involved, however investment dealers and exempt market dealers may participate.
- There is no registration exemption for dealers, ensuring suitable know-your-client measures.
- A report of exempt distribution would need to be filed within ten days; however, unlike other exempt distributions, the company would not be required to provide information on the purchasers.
The proposed exemption would be available to a public company that satisfies the following criteria:
- It has equity securities listed on a recognized Canadian stock exchange;
- It has been a reporting issuer for at least 12 months in at least one jurisdiction in Canada;
- It is compliant with all continuous disclosure requirements under Canadian securities laws; and
- It has active and ongoing business operations and its principal asset is not cash, cash equivalents or its exchange listing.
A company that wishes to rely on the proposed exemption would prepare and file a short offering document that would not be subject to regulatory review but would form part of the company’s continuous disclosure record for secondary market civil liability purposes. The offering document would supplement the company’s existing continuous disclosure record and provide certain updated material information.
The offering document would highlight:
- Any new developments in the company’s business;
- Confirmation that the company will have sufficient funds to last 12 months after the offering;
- The intended use of the proceeds from the offering; and
- The use of proceeds from any other offering completed in the past 12 months.
The company would certify complete disclosure of all material facts and the absence of misrepresentations. In the event of a misrepresentation, purchasers of securities under the proposed exemption would have the same rights of action as purchasers on the secondary market, as well as a right of rescission against the company for a period of 180 days following the distribution.
The proposed exemption would not be available to companies intending to use the proceeds for a significant acquisition or a restructuring transaction. In such instances, a prospectus would be required to comply with additional financial statement disclosure requirements.
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