On February 11, 2015, the OSC’s new capital raising prospectus exemption for reporting issuers listed on the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), the Canadian Securities Exchange (CSE) or the Aequitas NEO Exchange1 (Aequitas and collectively, the Exchanges) is scheduled to come into effect in OSC Rule 45-501 Ontario Prospectus and Registration Exemption. This new exemption will provide existing security holders who have already acquired securities of a listed issuer with the opportunity to participate in primary offerings of that issuer (the OSC Existing Security Holder Exemption).
Before relying on the OSC Existing Security Holder Exemption, the listed issuer must satisfy several conditions, including:
- the issuer, other than an investment fund has a class of equity securities listed on one or more of the Exchanges;
- the offering consists only of the class of securities listed on one or more of the Exchanges, or units consisting of the listed security and a warrant to purchase the listed security;
- the issuer must make the offering available to all existing security holders who hold the same class and series of the listed security;
- an offering cannot result in an increase of more than 100% of the outstanding securities of the same class;
- each investor must confirm in writing that as at the record date, the investor held, and continues to hold, the type of listed security that the investor is purchasing under this exemption;
- unless the investor obtains suitability advice from an investment dealer, the investor is limited to purchasing an aggregate of not more than $15,000 in a 12-month period;
- the issuer must issue a news release detailing the proposed offering, including the proposed use of proceeds;
- the issuer must comply with its continuous disclosure obligations;
- the subscription agreement must provide the investor with a right of action for any misrepresentation that the issuer makes in its continuous disclosure documents;
- the issuer is not required to provide an offering document to investors;
- if the issuer provides offering materials, the issuer must file such materials (other than the subscription agreement) on the same day the issuer provides these materials to investors;
- the issuer must file a report of exempt distribution within 10 days of the distribution; and
- the securities are subject to a four month hold period.
The other Canadian jurisdictions, other than Newfoundland and Labrador have already adopted a substantially similar exemption (the Canadian Exemption). Alberta and Québec implemented the Canadian Exemption by way of rule whereas the remaining Canadian jurisdictions implemented it by way of blanket order. In British Columbia, this exemption is found in BC Instrument 45-534 Exemption from prospectus requirement for certain trades to existing security holders.
There are, however, two differences between the OSC Existing Security Holder Exemption and the Canadian Exemptionsup>2 (together, the Exemptions). They are that the OSC Existing Security Holder Exemption has a carve-out for investment funds and the offering under this exemption cannot result in an increase of more than 100% of the outstanding securities of the same class.
They are similar in that the Exemptions provide only an exemption from the prospectus requirement. There is no parallel exemption for the dealer registration requirement. That said, issuers with an active non-securities business do not have to register as a dealer because they are not in the business of trading.
The rationale for adopting the Exemptions was to allow small and medium sized issuers to increase their ability to access existing shareholders for additional financing without incurring the costs of a prospectus. The Exemptions also permit existing shareholders to increase their investments in an issuer without having to purchase securities in the secondary market, which would otherwise require them to pay market prices and brokerage fees.
The OSC Existing Security Holder Exemption is the OSC’s first step into the exempt markets. The OSC is currently considering implementing the offering memorandum exemption, the friends, family and business associates exemption, and a crowdfunding exemption.
This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.
- Aequitas and its parent company, Aequitas Innovations Inc. sought authorization from the OSC to operate as an exchange for listing and trading equity and debt securities and certain structured products. An exchange must be “recognized” by at least one member of the Canadian Securities Administrators and seek an exemption from the other Canadian jurisdictions. On November 13, 2014, Aequitas received its recognition order from the OSC, effective March 1, 2015. The OSC is the “Lead Regulator” and will directly oversee this exchange. In December 2014, Aequitas obtained exemption orders, also effective March 1, 2015 from the other Canadian jurisdictions, which will rely on the OSC as the Lead Regulator for its oversight of this exchange. Reporting issuers with a class of equity securities listed on the Aequitas may begin using the Existing Security Holder Prospectus Exemption after March 1, 2015.
- The Canadian Exemption does not list Aequitas as one of the Exchanges on which an issuer may have a class of equity securities listed. The Canadian jurisdictions will likely amend the Canadian Exemption to include Aequitas after its effective date.