New developments on Canadian rights offerings

The Canadian Securities Administrators (CSA) recently amended the rights offering prospectus exemption to facilitate rights offerings by reporting issuers other than investment funds. Historically the rights offering exemption has not been widely used by such issuers as a capital-raising method. Following the amendments, both the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) issued guidance regarding rights offerings. Both exchanges have confirmed that for prospectus-exempt rights offerings, notwithstanding that a rights offering circular is no longer subject to advance review and approval by the relevant securities commissions, the TSX or the TSXV rules will need to be complied with (including pre-clearance of the notice and offering document and the relevant discount rules).

However, in an effort to facilitate a shorter time frame, the minimum number of days required between the date of filing the final offering document and the record date for the offering has been reduced from seven to five trading days. In addition, the TSXV has reduced the minimum subscription price for securities acquired on the exercise of a right from $0.05 to $0.01.

Amended rights offering prospectus exemption

On December 8, 2015, the CSA amended the prospectus-exempt rights offering regime. The purpose of the amendments was to streamline the rights offering prospectus exemption and make it a more attractive method of financing. The key features of the amended exemption are:

• the exemption is only available to reporting issuers other than investment funds;
• no regulatory review or approval of the rights offering circular is required by the relevant securities regulators;
• shareholders must be sent a prescribed form of notice of the offering, which will be filed on SEDAR and inform them how to electronically access the rights offering circular. The prescribed form for the rights offering circular has been simplified, should follow a Q&A format, does not require business information and must be limited to a maximum of 10 pages. The circular need not be sent to security holders but must be filed on SEDAR;
• the dilution threshold applicable to the securities issued under the exemption in the prior 12-month period is increased to 100% from 25%;
• the exercise period must be open for a minimum of 21 days and a maximum of 90 days;
• securities must be offered pro rata to existing shareholders;
• if the rights offering circular contains a misrepresentation, it may potentially give rise to statutory secondary market civil liability;
• stand-by guarantors are permitted and securities acquired pursuant to a stand-by commitment will not be subject to any re-sale restriction as previously proposed;
• foreign issuers may extend rights offerings to Canadian shareholders where they constitute 10% or less of all shareholders and such shareholders hold less than 10% of the issuer’s securities. Previously there was an additional provincial/territorial threshold of 5% for each jurisdiction.

Exchange updates

The TSX has published the following guidance on the rights offerings rules in the TSX Company Manual:

• the rights offering documents (i.e.: prospectus or, in the case of a prospectus-exempt financing, the notice and circular) must be pre-cleared by the TSX. The TSX has reduced its review period from seven to five trading days;
• the record date cannot be determined until the rights offering documents are in final form. The TSX has reduced the period between the date final documentation is filed to the record date from seven to five trading days.

The TSXV has published the following guidance on the rights offerings rules in the TSXV Corporate Finance Manual:

• the rights offering documents (i.e.: prospectus or, in the case of a prospectus-exempt financing, the notice and circular) must be pre-cleared by the TSXV;
• the record date cannot be determined until the rights offering documents are in final form. The TSXV has reduced the period between the date final documentation is filed to the record date from seven to five trading days;
• the subscription price for securities to be acquired on the exercise of rights will be reduced from $0.05 to $0.01. Until the proposed policy is formally adopted, the TSXV will, on application, grant waivers of the current $0.05 minimum subscription price;
• an issuer can elect not to have the rights listed for trading on the TSXV;
• shareholder approval of the creation of any new control person resulting from a stand-by commitment will generally not be required, provided that the rights are listed for trading on the TSXV and the subscription price for the rights is at a significant discount to the market price;
• before the TSXV will accept a rights offering that includes a stand-by commitment, any individual who may own or control, directly or indirectly, securities representing more than 10% of the voting rights of the company on the completion of the rights offering must first file a Personal Information Form or Declaration.

Sample timeline

The following timeline is for illustrative purposes only and meant to demonstrate the potential timeline from the filing of the draft rights offering documents with the relevant stock exchange until the record date where there are no significant issues identified by the exchange. Issuers are advised to contact their legal counsel and the relevant exchange prior to commencing a rights offering to confirm the timeline is appropriate to their circumstances.

Copies of the stock exchange guidance and the CSA amendments can be accessed below:

TSX Staff Notice

TSXV Bulletin

CSA Notice of Amendments