Canadian Securities Administrators create new prospectus exemption to streamline capital raising for listed issuers

On September 8, 2022, the Canadian Securities Administrators announced the adoption of a new prospectus exemption for reporting issuers listed on a Canadian stock exchange that wish to complete a private placement offering without the application of a four month hold period. The new Listed Issuer Financing Exemption allows issuers to distribute freely tradeable listed equity securities without filing a prospectus, in reliance on their existing disclosure record and a new offering form. Provided all necessary ministerial approvals are obtained, the amendments to National Instrument 45-106 – Prospectus Exemptions creating the new Listed Issuer Financing Exemption will come into effect on November 21, 2022.

Qualifications

The Listed Issuer Financing Exemption may be used by issuers that:

• have been a reporting issuer for at least twelve months;
• have equity securities listed on a recognized Canadian stock exchange;
• have had active business operations for at least twelve months and whose principal asset was not cash, cash equivalents, or their exchange listing (including special purpose acquisition vehicles, such as capital pool companies on the TSX Venture Exchange) over the past twelve months;
• is not an investment fund;
• have generally complied with their continuous disclosure obligations under Canadian securities laws;
• have sufficient capital to meet their business objectives and liquidity requirements for 12 months following the date of the distribution; and
• are distributing listed equity security or a unit consisting of a listed equity security and a warrant to acquire a listed equity security.

Limitations

Issuers using the Listed Issuer Financing Exemption are limited to raising, within a 12 month period, the greater of $5,000,000 and 10% of the issuer’s market capitalization, subject to a maximum of $10,000,000. Issuers are also restricted from issuing more than 50% of their outstanding securities inclusive of any securities to be issued under the proposed offering in the same 12 month period.

Issuers are not permitted to use the funds raised pursuant to the exemption for a significant acquisition (as defined under Part 8 of National Instrument 51-102 – Continuous Disclosure Obligations), a restructuring transaction, or any other transaction for which the issuer seeks security holder approval.

Required filings

Prior to completing a distribution under the exemption, an issuer is required to publicly announce the offering and file the newly created Form 45-106F19 – Listed Issuer Financing Document, which includes:

• a summary of the offering terms;
• a summary description of the issuer’s business, including recent developments and the issuer’s business objectives and milestones;
• any material facts that haven’t previously been publicly disclosed;
• a summary of the issuer’s available funds, including the funds to be raised under the offering;
• the intended use of the issuers available funds;
• the issuers use of funds from previous financings;
• involvement of any dealers or finders in the proposed offering and their compensation;
• a summary of purchaser’s rights in the event of a misrepresentation or omission of a material fact; and
• a certificate signed by the issuer certifying that the offering document and any documents publicly filed during the 12-month period preceding the date of the offering document (or since the issuer’s most recent audited annual financial statements were filed if they were filed more than twelve months ago), contain disclosure of all material facts about the securities being distributed and do not contain a misrepresentation.

Within 10 days of distributing securities under the Listed Issuer Financing Exemption, the issuer must file a Form 45-106F1 – Report of Exempt Distribution in every jurisdiction in which a distribution has been made.  If a distribution is completed in Quebec, Form 45-106F19 must be prepared in French or both English and French.

Material changes during distribution

If the Issuer undergoes a material change following the announcement of a distribution under the Listed Issuer Financing Exemption, the Issuer is required to cease the distribution until it: (i) generally complies with its continuous disclosure requirements under securities law with respect to the material change; (ii) files an amendment to its Form 45-106F19; and (iii) issues a press release stating that its Form 45-106F19 has been amended to address the material change.

Statutory liability

Investors can rescind their purchase or seek damages against the issuer (and individuals in certain jurisdictions) for misrepresentations or omissions of material facts in: (i) the offering document; or (ii) any documents publicly filed during the 12-month period preceding the date of the offering document (or since the issuer’s most recent audited annual financial statements were filed if they were filed more than twelve months ago).

Takeaways

The Listed Issuer Financing Exemption will allow issuers to raise smaller amounts of capital at lower costs. Although the exemption is of particular interest to junior reporting issuers, it will be beneficial to any issuer seeking to raise capital while avoiding resale restrictions imposed on securities issued by way of private placement offerings and the greater costs that are usually associated with public offerings. In addition, the exemption will provide junior reporting issuers with greater access to retail investors and shall correspondingly provide retail investors with a broader selection of investment opportunities.

Should you have any questions regarding this exemption or require further information, please do not hesitate to contact the authors of this article.