New prospectus exemption: listed issuers

The Canadian Securities Administrators (CSA) will introduce a new prospectus exemption for listed issuers wishing to raise equity capital by amending National Instrument 45-106 Prospectus Exemptions (NI 45-106) effective November 21, 2022 (the Listed Issuer Exemption).  

The new exemption forms part of the CSA’s ongoing efforts to reduce the regulatory burden for non-investment fund reporting issuers. Reliance on the exemption means that a prospectus will not be required to be prepared by a listed issuer and reviewed by the relevant Canadian securities authorities, thereby reducing time and costs. In addition, it will not be necessary for venture issuers relying on the exemption to prepare an AIF to rely on the short-form prospectus system. It will be of particular interest to smaller issuers looking for an alternative offering model. The Listed Issuer Exemption is aimed at facilitating retail investor participation and providing investors with more consistent disclosure. The rationale for the Listed Issuer Exemption is based upon a reporting issuer having a complete, accurate and up-to-date continuous disclosure record. The exemption was initially released for public consultation in July 2021 (the Initial Proposal). The key changes to the Initial Proposal are described below.

Conditions of exemption

To rely on the Listed Issuer Exemption, an issuer:

• must be listed on a Canadian stock exchange recognized by Canadian securities regulators and have been a reporting issuer for at least 12 months immediately prior to announcing the transaction in at least one Canadian jurisdiction;
• must have an up-to-date continuous disclosure record that will form the basis of the exemption;
• must have active business operations or its principal asset must not be cash (or an equivalent) or its exchange listing. The exemption cannot be relied upon by a special purchase acquisition company, a capital pool company, a growth acquisition company or any similar person or company; 
• will need to prepare a short offering document that will be considered a “core” document under the secondary market civil liability regime; and
• must have sufficient resources for 12 months of operation.

The amounts that may be raised in reliance on the exemption are limited as follows:

• combined with other distributions made under the exemption during the 12-month period immediately before announcing the transaction, the amount raised under the exemption must not exceed the greater of $5 million or 10% of the issuer’s aggregate market capitalization to a maximum of $10 million; and
• the distributions of securities made under the exemption during the 12-month period may not result in more than 50% equity shareholder dilution. The shareholder dilution percentage has been reduced from 100% in the Initial Proposal.

Types of security 

Securities distributed under the exemption must be listed equity securities or units consisting of listed equity securities and warrants convertible into listed equity securities. The CSA is of the view that listed equity securities are easier for investors, especially retail investors, to understand and such securities have a market valuation. The exemption may not be used to distribute subscription receipts or convertible debt.

Use of proceeds

The proceeds of funds raised under the Listed Issuer Exemption may not be used 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. 

Underwriter

To rely upon the Listed Issuer Exemption, there is no requirement for a registrant to be engaged in connection with the offering. Investment dealers and exempt market dealers (EMDs) that are involved and in the business of trading in securities will need to be registered and comply with their registration requirements. For example, dealers placing securities with their clients will need to satisfy their client obligations to ensure the investment is suitable (KYC / KYP requirements). When relying on the exemption issuers may engage EMDs, which is not the case for a prospectus offering.

The news release, offering document and reporting obligation

The issuer must announce the offering by news release before soliciting offers to purchase securities. The issuer must state that the financing document is accessible on www.sedar.com and on the issuer’s website, assuming it has a website. The news release must contain a statement that any potential investor should read the financing document before making an investment decision.

The financing document must be prepared in the form prescribed by NI 45-106 F-19. The document will need to include the following information in a Q and A format:

• the securities offered and the conditions/limitations of the offering;
• the minimum and maximum amount of securities being offered;
• a prescribed cover page risk warning that (i) the investment may not be suitable for all potential investors; (ii) investors should be willing to lose their entire investment; and (iii) potential investors should be encouraged to seek the advice of a registered dealer as to the suitability of the investment for them;
• a statement that the offering document has not been reviewed by any securities regulator;
• certification that both the financing document and 12-month continuous disclosure record of the issuer contain no misrepresentations;
• a summary description of the business, recent developments, material facts and business objectives and milestones of the issuer;
• a detailed breakdown of the use of the financing proceeds of the distribution and, if applicable additional sources of funds;
• a description of the disclosure of the use of the proceeds from any financing in the prior 12 months and variances from such disclosure;
• the involvement of dealers or finders and their fees and, if applicable any dealer conflicts;
• a description of statutory rights of rescission and damages; and
• certification by the CEO and CFO of the issuer.

The financing document must be filed with the relevant securities regulators before soliciting a purchase and no later than three business days after the date of the financing document. The document (together with the continuous disclosure documents) must disclose all material facts about the issuer and its securities and must not contain a misrepresentation. It must be in French or French and English for use in Quebec. The distribution must end no later than the 45th day after the offer is announced by news release.

If a material change occurs after the filing of the news release and before the completion of the offering, the distribution must cease until an amended financing document has been filed and an amended news release has been issued. Material change reporting obligations must also be complied with. 

To allow CSA members to collect data on the offerings, a Form 45-106F1: Report of Exempt Distributions must be filed and the relevant fees paid within 10 days of the distribution of the securities. In addition, detailed information on the purchasers is required (Schedule 1), which represents a change from the Initial Proposal.

Freely tradeable securities

Equity securities issued in reliance on the exemption will be freely tradeable but subject to a seasoning period that will be satisfied by the issuer being required to be a reporting issuer in good standing for the prior 12-month period in order to rely on the exemption. This differs from the accredited investor exemption where a four-month hold period from the date of the distribution is imposed.

Liability of issuers and others

The issuer, and in certain jurisdictions, its directors and executive officers who sign the financing document, will have primary offering liability to purchasers of securities made under the exemption regarding misrepresentations contained in the financing document and its 12-month continuous disclosure record. Purchasers under the exemption will have a right to rescind the purchase within a period of 180 days of purchase. The issuer and others will also be liable under the secondary market liability regime to any purchaser or seller in the secondary market in the event the financing document contains a misrepresentation.

Interaction with NI 45-106

An issuer is free to choose which exemption it wishes to rely upon to complete a private placement. The benefit of the Listed Issuer Exemption is that securities can be purchased by a broader group of purchasers than those who are accredited investors, which may include retail investors. In addition there will be no hold period on the securities issued as there would be when the accredited investor exemption is relied upon. Therefore, accredited investors may wish to purchase under the listed issuer exemption for this reason. There may be an advantage in relying on another exemption, such as the accredited investor exemption, for a long-term investment where a possibly greater pricing discount may be available. It remains to be seen, as the CSA notes, what discount the exchanges will consider applying to trades made in reliance on the Listing Issuer Exemption, as they are freely tradeable.

The amendments to NI 45-106 are available here.