A new prospectus exemption is coming to National Instrument 45-106 called the Listed Issuer Financing Exemption. This new exemption is going to significantly change the game for public companies and how they raise money in all Canadian jurisdictions. Most reporting issuers will be able to able to utilize this exemption to raise up to the greater of $5,000,000 or 10% of their market cap, to a maximum of $10,000,000. What is unique about this exemption is that:
- The securities are free trading immediately;
- You can sell to any investor (they don’t have to be accredited);
- You must file a small offering document on SEDAR; and
- You must have been reporting for at least 12 months.
This new exemption removes the need to do a short form or shelf prospectus or an ATM offering since you can achieve the same outcome through a private placement at a fraction of the cost and time. See more details below and in the link to the proposed new rule.
The purpose of this article is to discuss the details of an upcoming update to NI 45-106. Among other changes, the Canadian Securities Administrators (the “CSA”) are introducing a new prospectus exemption for reporting issuers that are listed on a Canadian stock exchange, known as the Listed Issuer Financing Exemption. The CSA’s short form prospectus regime was implemented with the objective of facilitating efficient capital raising for issuers while providing investors with all the protections of a prospectus. Feedback from commenters regarding the regime reflected that the time and cost to prepare a short form prospectus impeded capital raising, particularly for smaller issuers. In recognition of this impediment and the comprehensive continuous disclosure regime for reporting issuers, in addition to certification requirements and risk of secondary market liability, the CSA, among making various revisions, introduced the new Listed Issuer Financing Exemption, with the stated the objective of facilitating efficient capital raising, while ensuring that investors are still provided with sufficient information to make informed decisions.
The new Listed Issuer Financing Exemption will be available all reporting issuers, but is designed to benefit smaller issuers more specifically. The limitations on the use of this exemption reflect this philosophy. To use this exemption, issuers will generally be limited to raising the greater of $5,000,000 or 10% of the issuer’s market capitalization, up to a total amount of $10,000,000. The issuer must also have been a reporting issuer in a Canadian jurisdiction for at least 12 months. Misrepresentations will subject statutory liability for the issuer using the exemption and, in some jurisdictions, the executives signing the offering document and the issuer’s directors.
Especially for smaller issuers, the process of raising capital is critical to early growth and stability. As a result, time and resources are especially precious. We agree that this new exemption promotes the objectives stated in the CSA Notice of Amendments and we believe that this additional exemption will be very helpful for facilitating early growth of issuers.
Securities laws generally require the filing of a prospectus to qualify for any non-exempt “distribution” of securities and to be able to sell to the public generally (i.e., to persons other than accredited investors or those who fall into another eligible exemption). A prospectus must contain full, true, and plain disclosure of all material facts relating to the securities being offered and is generally a very lengthy and costly document to produce. As well, an offering prospectus requires an underwriter, which can be difficult to obtain for a smaller issuer. In the absence of an exemption, no person or company may “trade” in a security where such trade constitutes a “distribution” unless a prospectus has been filed. This is why exemptions are necessary to raising capital without a prospectus.
On a cross-border note, this structure of disclosures and exemptions shares several parallels with the United States, with Regulation D of the Securities Act of 1933 allowing capital to be raised through the sale of equity or debt securities without the need to register those securities with the Securities and Exchange Commission (the “SEC”). However, these sales of securities still must comply with any applicable state securities laws, also known as “Blue Sky Laws.” It should be noted that, in the United States, offerings pursuant to Rule 506 of Regulation D are eligible for Blue Sky law preemption, in which case the states are permitted to require only notice filings and filing fees. While many Blue Sky Law exemptions can differ across the states, much like the harmonized regulations of NI 45-106, they tend to share several categories.
Provided that all necessary ministerial approvals are obtained, the Amendments and the changes will come into effect on November 21, 2022. Anyone who has any questions or needs legal assistance on matters related these changes should visit our website at https://www.corpcounsel.ca.
By: Michael Bluestein, Melanie Sokalsky and Adam Ellenbogen
The full rule from the OSC: Click here