In November 2022, a new prospectus exemption, the listed issuer financing exemption (the exemption), became effective. The purpose of this exemption is to provide, for certain issuers, the option to raise small amounts of capital relying on their continuous disclosure filings.
While the exemption promises to create another flexible and efficient method to access public capital, we note that the use of the prospectus exemption might not be available to all issuers and there are limits on how much an issuer can raise relying on the exemption in any one-year period.
The prospectus exemption will be available to an issuer if:
a) it has been a reporting issuer in a Canadian jurisdiction for at least 12 months;
b) it has listed equity securities on a recognized stock exchange in Canada;
c) it has active business operations (e.g. its operations have not ceased, and it is not a capital pool company or special purpose acquisition company) and it has not recently completed a restructuring transaction with a person or company that did not have active business operations;
d) it is not an investment fund;
e) it has filed all continuous disclosure documents required under Canadian securities legislation;
f) it has filed a short offering document in the form prescribed under Form 45-106F19 – Listed Issuer Financing Document (Short Offering Form); and
g) it does not intend to allocate its available funds to complete a significant acquisition, a restructuring transaction or any other transaction for which security holder approval would be required.
Types of Securities
The securities issuable under the exemption are limited to listed equity securities and units comprised of listed equity securities and warrants exercisable into listed equity securities[1]. Provided that all conditions are satisfied, the Canadian Securities Administrators (CSA) clarified in its guidance published in June 2023[2] that issuers may also distribute flow-through shares and charitable flow-through shares under the exemption. The securities issued will be freely tradable (i.e. not subject to resale restriction under National Instrument 45-102 – Resale of Securities) although the securities may be subject to other restrictions such as the TSX Venture Exchange hold period. An issuer may combine in an offering this exemption with other prospectus exemptions, keeping in mind that the resale restrictions will be different.
Maximum Amounts
The maximum amount of proceeds that may be raised by an issuer relying on the exemption, in any one-year period, is the greater of $5 million or 10% of its market capitalization, up to a maximum amount of $10 million. The CSA has clarified that any potential proceeds to be received upon the exercise of warrants issued under the financing do not need to be included in this calculation. In addition, a distribution using the exemption, combined with all other distributions made under the exemption in any one-year period, may not result in an increase of more than 50% in the issuer’s outstanding listed securities. Note that any equity securities issuable upon the exercise of warrants must be taken into account in this calculation.
Sufficient Available Funds
An issuer who wishes to use the exemption must reasonably expect that it will have sufficient available funds to meet its business objectives and continue its operations for a period of 12 months following the distribution. In order to satisfy this requirement, issuers may need to set a minimum offering amount. Such minimum offering amount may not be less than the issuer’s estimate of the funds required to continue its operations and achieve its business objectives for the next 12 months, considering offering costs, the issuer’s working capital or deficiency, projected operating cash flow[3] and any committed sources of additional funding. An issuer should disclose in the offering document each significant event that must occur for its business objectives to be met and the costs related thereto. In addition, the issuer must provide a breakdown of its available funds after the distribution and how it intends to use such funds in the offering document.
No Pre-Marketing
Before soliciting an offer to purchase, issuers will need to (i) file with the securities regulatory authorities in each jurisdiction where the offering is being conducted: (a) a news release announcing the distribution that contains prescribed language[4], and (b) a completed Short Offering Form; and (ii) if the issuer has a website, post the completed Short Offering Form on its website. Issuers will also need to make sure that all information provided to purchasers in the Short Offering Form and in certain of their continuous disclosure documents disclose all material facts about the securities being offered. If the Short Offering Form contains misrepresentations, purchasers of securities would have the right to rescind their purchase or a right to claim damages from the issuer.
Since no solicitations may occur before the issuer has filed the news release and Short Offering Form, issuers may not rely on the exemption to issue securities for debt, as such requirement would not be satisfied. We caution issuers that using the exemption in the context of a bought deal offering will require close attention to ensure that this requirement as well as others are satisfied.
Distribution in the Province of Quebec
To use the exemption in Quebec, only the offering document and the news release announcing the offering need to be filed in French or French and English (not the continuous disclosure documents that the issuer has filed on SEDAR+)[5]. While an issuer could technically use the exemption concurrently with a prospectus offering, it may not do so to avoid the requirement to translate to French the prospectus and continuous disclosure documents (i.e. use the exemption in Quebec concurrently with a prospectus in other provinces).
Multiple Tranches
An issuer may close an offering under the exemption in multiple tranches provided that the proceeds for the first tranche represent at least the minimum offering amount and that the last tranche closes no later than the 45th day after issuing and filing the news release announcing the offering. Within 10 days of any distribution under the exemption, the issuer must file a report of exempt distribution.
[1] Note: The CSA is of the view that broker warrants would not typically be considered a ‘listed equity security’ and therefore the exemption would not be available for their distribution.
[3] Note: The CSA expects that the projected operating cash flow will be similar to cash flow from operations in the issuer’s most recent financial period unless there are changes in key assumptions.
[4] Prescribed language: “There is an offering document related to this offering that can be accessed under the issuer’s profile at www.sedarplus.ca and at [include website address and provide link, if the issuer has a website]. Prospective investors should read this offering document before making an investment decision.”
[5] Unless the issuer is a reporting issuer in Quebec, in which case it must comply with the linguistic obligations of the Province of Quebec.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written by Myreille Gilbert, Partner at McCarthy Tétrault LLP.