Listed Issuer Financing Exemption: The CSA answers frequently asked questions from market participants
Last year, the Canadian Securities Administrators (the “CSA”) approved a prospectus exemption for reporting issuers listed on a Canadian stock exchange wishing to raise equity capital (the “Listed Issuer Financing Exemption”). Our team at DLA Piper (Canada) LLP published a primer on the Listed Issuer Financing Exemption, which has become well utilized by publicly traded venture companies. To supplement this new exemption, the CSA has recently issued a staff notice to answer frequently asked questions market participants have posed and preliminary observations on offerings using the exemption to date.
Qualifications
Issuer in default: Issuers that are in default of securities legislation requirements, and unable to satisfy the conditions in paragraph 5A.2(e) of National Instrument 45-106 Prospectus Exemptions (“NI 45-106”), are unable to utilize the Listed Issuer Financing Exemption until the issuer has addressed any existing defaults.
Listed equity securities: Reporting issuers that do not have listed equity securities currently trading on a Canadian exchange in accordance with paragraph 5A.2(b) of NI 45-106 are also unable to utilize the Listed Issuer Financing Exemption. The issuer’s equity securities must be listed at the time of a distribution using the Listed Issuer Financing Exemption. Such listing cannot occur concurrently or following the closing of an offering using the Listed Issuer Financing Exemption. This requirement also pertains to when an issuer is soliciting purchasers by issuing a news release and filing the offering document required by the Listed Issuer Financing Exemption.
Available funds requirement
Meeting business objectives and liquidity requirements: Issuers must have sufficient funds to continue operations and achieve their objectives for a period of 12 months following the distribution in order to utilize the Listed Issuer Financing Exemption. This determination will be unique to each issuer, but generally Item 7 Business objectives and milestones of Form 45-106F19 Listed Issuer Financing Document (“Form 45-106F19”) states the business objectives an issuer can expect to accomplish with available funds and that past cash flow from operations should be considered. The CSA has also indicated that the issuer should generally set a minimum offering amount that includes an estimate of the funds required to continue operations and achieve business objectives in the next 12 months when preparing a Form 45-106F19.
Multiple tranches: The Listed Issuer Financing Exemption is not ousted by the use of multiple tranches for an offering, subject to the maximum amount that can be raised in a 12-month period. However, the CSA has noted any minimum offering amount must be satisfied by the closing of the first tranche and the last tranche must close no later than the 45th day after issuing and filing the news release announcing the offering.
Types of securities
Flow-through shares: So long as flow-through shares or charitable flow-through shares are listed equity securities and other requirements are met, flow-through shares and charitable flow-through shares may be issued using the Listed Issuer Financing Exemption. In the case of charitable flow-through shares, the end purchaser must be named in the report of exempt distribution to be filed following closing and be provided with all statutory rights provided under the exemption.
Broker’s warrants: The CSA has noted that broker’s warrants are not typically a listed equity security and therefore may not be issued pursuant to the Listed Issuer Financing Exemption.
Securities for debt: The Listed Issuer Financing Exemption is not available for the issuance of securities for debt. The CSA has noted that doing so would violate the condition of not soliciting an offer to purchase before issuing and filing a news release announcing the offering and filing the requisite Form 45-105F19.
Types of offerings
Bought deal offering: If a bought deal offering is conducted in such a way that the actual purchaser has all the rights contemplated under the Listed Issuer Financing Exemption and will be named in the report of exempt distribution to be filed following closing, the CSA has indicated that the Listed Issuer Financing Exemption could be available for a bought deal offering. However, if the underwriter were to end up having to purchase securities subject to the bought deal that have not been purchased by substituted purchasers, the distribution to the underwriter is to be completed under section 2.33 of NI 45-106 and would not qualify for the Listed Issuer Financing Exemption. The issuer and underwriter would also need to ensure that any marketing of the offering complies with the conditions of the exemption to prevent solicitation prior to the issuance and filing of the news release and filing of the Form 45-106F19.
Other prospectus exemptions: The Listed Issuer Financing Exemption can be used concurrently with other prospectus exemptions. However, the CSA has noted that other exemptions carry a hold period and the Listed Issuer Financing Exemption does not.
Quebec: The Listed Issuer Financing Exemption cannot be used in Quebec concurrently with a prospectus in other provinces. However, if the reporting issuer is in Quebec and required to comply with the linguistic obligations of that province under Part 3 of NI 51-102 Continuous Disclosure Obligations, the issuer may be permitted to use the exemption in Quebec and file Form 45-106F19 and the news release in French, but not the continuous disclosure documents filed on SEDAR.
Other practice questions
Common share warrants: An issuer must include common shares that are issuable on the exercise of warrants in calculating the 50 percent dilution limit under the Listed Issuer Financing Exemption. The CSA has noted that the value of those underlying common shares need not be included in the calculation of the total dollar amount of the distribution with reference to the maximum amount allowed to be raised within 12 months. This condition refers to only the initial distribution.
Subscription agreement: Issuers are not required to prepare a subscription agreement or a risk acknowledgement to be signed by the purchaser, though such agreements may be utilized if the issuer would prefer.
For further information on the Listed Issuer Financing Exemption please contact the authors or any of the members of our Securities and Capital Markets Group.
