Jun 28, 2023
On November 21, 2022, the Canadian Securities Directors (CSA) introduced into impact the listed issuer financing exemption (the listed issuer exemption) by amendments to Nationwide Instrument 45-106 Prospectus Exemptions (NI 45-106) and sure different consequential amendments. The listed issuer exemption is a prospectus exemption that permits reporting issuers with fairness securities listed on a Canadian inventory alternate to boost capital by submitting a Kind 45-106F19 Listed Issuer Financing Doc (providing doc) and distribute freely tradeable fairness securities in reliance on the issuer’s steady disclosure report, topic to sure circumstances outlined in NI 45-106.
On June 1, 2023, the CSA revealed CSA Workers Discover 45-330 Regularly Requested Questions in regards to the Listed Issuer Financing Exemption (CSA Discover 45-330) to handle a number of the continuously requested questions concerning the listed issuer exemption. In CSA Discover 45-330, the CSA deal with sure key points and questions on the listed issuer exemption, based mostly on their observations and suggestions from market contributors through the approximate six-month interval that the listed issuer exemption has been in impact.
This Replace opinions CSA Discover 45-330 and supplies commentary on our expertise with financings beneath the listed issuer exemption.
In CSA Discover 45-330, the CSA make a lot of clarifications about the usage of the listed issuer exemption, together with that
- The listed issuer exemption is probably not utilized by an issuer in default of a securities laws requirement.
- An issuer should have fairness securities listed on a Canadian inventory alternate earlier than making use of the listed issuer exemption.
- In assessing the 50% dilution restrict of the issuer’s excellent listed fairness securities beneath the listed issuer exemption, any listed fairness securities (i.e., frequent shares) which might be issuable on train of warrants should be included when calculating dilution.
- The full greenback quantity of the distribution most allowed to be raised inside 12 months beneath the listed issuer exemption doesn’t embody frequent shares issuable on the train of warrants.
- The listed issuer exemption doesn’t require a subscription settlement or danger acknowledgement to be signed by the purchaser, however issuers could choose to have one to offer safety for themselves.
- An providing beneath the listed issuer exemption could also be closed in a number of tranches, supplied that
- if the issuer wants to boost a minimal providing quantity as a way to have accessible funds to fulfill its enterprise aims and liquidity necessities for a interval of 12 months, this minimal providing quantity should be raised within the first tranche closing; and
- the final tranche of the providing should shut no later than the 45th day after issuing and submitting the information launch asserting the providing.
- The listed issuer exemption could also be used to distribute flow-through shares, together with charitable flow-through shares.
- The listed issuer exemption could also be used for a purchased deal providing, supplied that
- the precise purchaser has all of the rights contemplated beneath the listed issuer exemption, together with statutory rights of motion within the occasion the providing doc or the issuer’s steady disclosure paperwork accommodates a misrepresentation, and can be named within the report of exempt distribution;
- the phrases of the purchased deal providing don’t require the underwriter to buy any fairness securities not taken up by purchasers; and
- the issuer and underwriter be sure that no solicitations to buy happen previous to the issuance and submitting of the information launch and the submitting of the finished providing doc.
- The listed issuer exemption could also be used concurrently with different prospectus exemptions.
- The listed issuer exemption is probably not used to distribute dealer’s warrants, because the listed issuer exemption could solely be used to distribute fairness securities or items consisting of fairness securities and warrants.
- The listed issuer exemption is probably not used for the issuance of securities for debt.
- The listed issuer exemption is probably not utilized in Québec concurrently with a prospectus in different provinces, because the CSA view this as an try solely to keep away from translation necessities that will additionally end in Québec purchasers having fewer rights than the purchasers buying beneath the prospectus. Until the issuer is already a reporting issuer in Québec, to make use of the listed issuer exemption in Québec, the issuer merely must translate the providing doc and the information launch required by NI 45-106.
The CSA additionally additional elaborated on how an issuer can meet the requirement that the issuer have sufficient funds for its enterprise aims and liquidity wants for the 12 months following the distribution pursuant to the listed issuer exemption. In figuring out whether or not an issuer has adequate funds, the CSA word that an issuer ought to consider the enterprise aims, milestones and associated prices that it’s required to reveal within the providing doc, in addition to its present money movement from operations and any probably future modifications to that money movement. The issuer must also take into consideration the prices of the providing (together with promoting commissions, charges and every other providing prices), the issuer’s working capital or deficiency and the truth that any further funding (together with funds from a concurrent purchased deal or an accessible credit score facility) should be dedicated to be thought-about as a part of the accessible funds. If the funds to be raised won’t cowl the entire issuer’s enterprise aims and liquidity necessities for a interval of 12 months, the issuer ought to improve the minimal providing quantity.
The junior issuer market has been fast to embrace the listed issuer exemption as a approach to facilitate smaller choices of free buying and selling securities. The listed issuer exemption has been adopted in quite a lot of various kinds of choices, together with non-brokered personal placements, brokered greatest efforts company choices and even purchased offers. Curiously, whereas one of many impetuses for the listed issuer exemption was to assist issuers keep away from massive reductions to market pricing pushed by a four-month maintain interval imposed by regulatory necessities, pricing pressures don’t appear to have modified very a lot. Nonetheless, it has given issuers a better capacity to push again on the inclusion of warrants in financings as an incentive to buyers to counter this four-month maintain interval. It ought to be famous that, for probably the most half, market circumstances have been horrible for junior issuers because the listed issuer exemption was adopted, so the long-term impact on issuers elevating capital will want additional time and evaluation.
CSA Discover 45-330 was useful and well timed to help issuers and sellers with a number of the questions which have arisen with choices beneath the listed issuer exemption. Set out beneath are different concerns based mostly on the CSA’s steerage and our expertise thus far.
50% dilution restrict
A typical query for listed issuer exemption choices was learn how to calculate the dilution restrict, and specifically whether or not share buy warrants supplied in a unit providing wanted to be counted in the direction of the utmost dilution permitted beneath the listed issuer exemption. NI 45-106 refers to a most improve in “listed fairness securities”, which suggests securities of a category of fairness securities listed on a acknowledged inventory alternate. There isn’t a reference to securities exercisable into listed fairness securities, which instructed that solely frequent shares (assuming that’s the solely class of securities listed) wanted to be included for functions of figuring out dilution. Nonetheless, CSA Discover 45-330 supplies that warrants or different convertible securities ought to be included for figuring out dilution.
It ought to be famous that warrants or convertible securities aren’t included for functions of figuring out the utmost quantity of proceeds allowed to be raised inside 12 months for an providing beneath the listed issuer exemption.
Pre-marketing is a delicate matter for junior issuer financings. It’s common for issuers to have discussions with potential buyers previous to asserting a financing as a way to trust that will probably be successful. The listed issuer exemption strictly prohibits any solicitation to buy previous to the issuance and submitting of the information launch and submitting of the finished providing doc. Which means the phrases and construction of the providing should be totally organized previous to any public announcement and the graduation of any advertising efforts.
If the providing is a brokered providing, because of this the seller and the issuer have to have totally thought-about investor participation previous to launching the providing. The engagement letter setting out the providing phrases may even have to be executed by the seller and issuer previous to any solicitation to buy.
CSA Discover 45-330 famous that the regulators don’t contemplate the listed issuer exemption to be accessible for a “shares for debt” distribution as a result of it will require the issuer to have interaction with the creditor previous to the announcement of the providing and to notice the constraints of the listed issuer exemption for purchased offers, which suggests a strict interpretation of the pre-marketing restriction.
This bears additional evaluation because the listed issuer exemption appears to be at odds with typical market observe.
The coverage rationale underlying the providing doc is that the listed issuer exemption is meant to rely largely on the issuer’s previous steady disclosure report to assist the distribution of free buying and selling securities. The listed issuer exemption depends on a simplified, condensed providing doc, versus the better element and breadth of disclosure concerned in a prospectus. Nonetheless, the providing doc shouldn’t be so simple as it could appear. Issuers can’t incorporate any disclosure paperwork by reference (not like a brief kind prospectus), so issuers should be sure that they strictly adjust to the shape necessities of the providing doc. For instance, the listed issuer exemption requires disclosure of current developments, simply as with a brief kind prospectus. However with no capacity to include by reference, issuers have to assess the providing doc as a standalone disclosure doc, which can imply including further disclosure.
The providing doc additionally requires detailed and fulsome disclosure on the usage of accessible funds. This features a detailed breakdown of how the issuer will use the accessible funds and an outline of every of the principal functions, with approximate quantities. That is just like the extent of disclosure required to explain the usage of proceeds of an providing in a prospectus, and requires extra element than would usually be the case for many prospectus-exempt choices.
Issuers are additionally reminded that within the occasion of a misrepresentation within the providing doc, purchasers have a recission proper and rights to damages towards the issuer, no matter whether or not the purchaser has relied on the misrepresentation.
Working capital necessities
An eligibility requirement for the listed issuer exemption is that the issuer fairly expects to have accessible funds to fulfill its enterprise aims and liquidity necessities for a interval of 12 months following completion of the listed issuer exemption providing. Securities regulators are reviewing providing paperwork and disclosure data to substantiate this requirement. Which means issuers should be sure that their use of obtainable funds addresses a interval of a minimum of 12 months to make sure that the listed issuer exemption remains to be accessible for the issuer.
The CSA word that although a subscription settlement or a danger acknowledgment to be signed by the purchaser shouldn’t be required, issuers could discover it of their greatest pursuits to think about using a subscription settlement which incorporates representations, warranties, acknowledgements and covenants of the purchaser concerning the purchaser’s standing and eligibility, compliance with native securities legal guidelines, acknowledgments of funding danger, reliance on prospectus exemptions and oblique assortment of personally identifiable info, amongst others. This type of subscription settlement could be just like the type of subscription settlement that issuers sometimes use in every other prospectus-exempt providing.
One other strategy that has been utilized is to incorporate the representations, warranties, acknowledgements and covenants straight into the providing doc as an appendix or schedule, as deemed representations, warranties, acknowledgements and covenants of the purchaser. This strategy could be analogous to the deemed representations, warranties, acknowledgements and covenants of the purchaser included in an providing memorandum. Issuers may contemplate additionally having a easy one-page subscription settlement that’s signed by the purchaser, which might act to doc the subscription and guarantee privity of contract with the purchaser.
The strategy taken by an issuer will largely rely upon the phrases of the providing and the kinds of purchaser representations, warranties, acknowledgements and covenants that will be required or desired by the issuer in reference to the providing. For instance, if the providing entails gross sales in overseas jurisdictions or flow-through shares, further representations, warranties, acknowledgements and covenants of the purchaser could also be sought by the issuer, through which case utilizing a subscription settlement could also be preferable.
TSX Enterprise Alternate maintain interval
It ought to be famous that securities issued by TSX Enterprise Alternate (TSX-V) listed issuers beneath the listed issuer exemption is probably not really free buying and selling if they’re topic to a TSX-V maintain interval.
The TSX-V imposes a four-month restriction interval on sure listed shares (or securities exchangeable into listed shares) issued, together with these issued to
- administrators, officers and promoters;
- consultants; and
- anybody holding greater than 10% of the voting rights hooked up to the issuer’s securities.
The identical restriction applies to inventory choices granted with an train worth lower than the market worth, and securities issued at lower than $0.05 if not certified by a prospectus or issued beneath a rights providing. Securities topic to a TSX-V maintain interval should bear an alternate legend indicating as such in accordance with the insurance policies of the TSX-V.
Gross sales in United States and overseas jurisdictions
Because the listed issuer exemption is a comparatively new prospectus exemption, how jurisdictions exterior of Canada will characterize this exemption with consideration to native securities legal guidelines stays considerably unsettled.
For instance, in america, the providing doc could also be characterised as akin to a prospectus and require a U.S. personal placement memorandum (a U.S. wrapper) as a way to supply to U.S. purchasers. In different overseas jurisdictions, issuers could run into further and cumbersome requests from purchasers and sellers, equivalent to for a authorized opinion on compliance with native legal guidelines with respect to the providing doc.
We anticipate that the market will acquire extra consolation with the listed issuer exemption going ahead, which can end in better certainty. Nonetheless, issuers shouldn’t assume that overseas jurisdictions will deal with listed issuer exemption choices as personal placements beneath their native guidelines. Issuers ought to contemplate these potential points and interact with their authorized advisors when initially figuring out the jurisdictions the place the providing utilizing the listed issuer exemption can be performed.
Combining with different choices and deciding on jurisdictions
CSA Discover 45-330 particularly notes that issuers can’t use the listed issuer exemption in Québec alongside a prospectus filed in different jurisdictions solely to keep away from translation necessities. Nonetheless, the place an issuer shouldn’t be a reporting issuer in a neighborhood jurisdiction, it’s attainable to hold out an providing within the native jurisdiction by the use of the listed issuer exemption whereas finishing up a concurrent prospectus providing in jurisdictions the place the issuer is a reporting issuer. That is useful the place the issuer has filed a shelf prospectus and needs to keep away from the delay required so as to add new jurisdictions to a shelf. Nonetheless, you will need to decide the providing jurisdictions upfront to have the ability to adjust to the necessities of the listed issuer exemption, notably the restriction from pre-marketing. Given the place of the Autorité des marchés financiers set out in CSA Discover 45-330, presumably combining a listed issuer exemption providing in Québec with a prospectus providing exterior of Québec can be topic to better scrutiny, even when the issuer doesn’t imagine that the only motive for structuring the providing on this approach was to keep away from translation necessities.
As with most different prospectus exemptions, statutory legal responsibility shouldn’t be imposed on sellers concerned in choices beneath the listed issuer exemption, and the sellers don’t signal the providing doc. The CSA word that they count on that registered sellers will nonetheless carry out due diligence on the issuer and its disclosure as a way to meet the seller’s suitability obligations beneath relevant securities laws, which incorporates know-your-client and know-your-product necessities. Registered sellers might also be topic to frequent regulation legal responsibility and reputational danger in reference to their participation within the providing. Accordingly, sellers concerned in an providing utilizing the listed issuer exemption ought to conduct the suitable due diligence evaluation on the issuer, together with a evaluation of the issuer’s steady disclosure paperwork and company data, in addition to due diligence classes with administration, amongst others.
The important thing challenge for brokered financings utilizing the listed issuer exemption is that the timing is a considerably totally different than with typical brokered personal placements. The seller might want to begin its due diligence evaluation sooner than it in any other case may as a way to meaningfully contribute to the providing doc and assess the adequacy of disclosure. The extra disclosure in regards to the providing that’s set out within the providing doc (which is usually greater than what could be set out in a information launch asserting a financing) additionally requires the seller to substantiate logistics for the providing sooner than it would in any other case. The pre-marketing restriction can be a key concern for sellers as no market verify can be accessible.