The Canadian Securities Administrators Announce New Prospectus Exemption

The Canadian Securities Administrators have approved amendments to National Instrument 45-106 – Prospectus Exemptions, to introduce the new “Listed Issuer Financing Exemption” for companies listed on a Canadian stock exchange (the “Exemption“).  By relying on a company’s existing continuous disclosure record and a simplified disclosure document, the Exemption is anticipated to reduce the regulatory burden and associated costs of certain financings for Canadian public companies. Subject to receipt of ministerial approvals, the Exemption is expected to be available for use on November 21, 2022.

Eligibility Criteria

To rely on the Exemption, a company must:

1. have been a reporting issuer in Canada at least 12 months;
2. have securities listed on a recognized Canadian stock exchange;
3. have active business operations;
4. not be an investment fund;
5. have filed all periodic and timely disclosure documents as required under applicable Canadian securities laws;
6. prepare a short offering document that will be considered a “core” document under the secondary market civil liability regime; and
7. reasonably expect that it will have available funds to meet its business objectives and liquidity requirements for a period of 12 months following the distribution.

Limitations on Scope of Application

The Exemption will only apply to offerings that fit within the following parameters:

1. The total dollar amount of the distribution, when combined with all other distributions undertaken by the company in reliance on the Exemption during the prior 12 month period, must not:
   1. exceed the greater of (i) $5 million, or (ii) 10% of the company’s market capitalization, to a maximum of $10 million; or
   2. result in an increase of more than 50% in the issuer’s outstanding listed equity securities, as of the date that is 12 months before the date of the news release announcing the distribution.
2. The security being distributed must be a listed equity security or a unit consisting of a listed equity security and a warrant exercisable to acquire a listed equity security.
3. The issuer must not allocate the available funds to (i) a significant acquisition, (ii) a restructuring transaction that would require additional financial statements under the prospectus rules, or (iii) any other transaction for which security holder approval is required.

Disclosure Requirements

To rely on the Exemption, a company must meet the following disclosure requirements:

1. The company must issue and file a news release that announces the offering and contains prescribed language, and the issuer must close the financing within 45 days of such news release.
2. The company must file a completed Form 45-106F19 Listed Issuer Financing Document (the “Form“), which is the streamlined disclosure document introduced for purposes of the Exemption, in accordance with the following requirements:

1. 1. the Form must be filed before soliciting an offer to purchase and no later than three business days after the date of the Form;
   2. if the company has a website, the Form must be posted on its website, and the company must take reasonable steps to ensure that prospective purchasers are aware of the means of accessing the Form; and
   3. the Form, together with all documents filed under Canadian securities laws within the earlier of (i) 12 months before the date of the Form and (ii) the date that the company’s most recent audited annual financial statements were filed, must disclose all material facts relating to the securities being distributed under the Exemption and must not contain a misrepresentation.

3. The company must include prescribed language in any initial written communication with a prospective purchaser.
4. The issuer must file a Form 45-106F1 Report of Exempt Distribution disclosing information related to the financing and the purchasers within 10 days of the distribution.

Under the Listed Issuer Financing Exemption, qualifying public companies will no longer need to prepare and file a short form prospectus and can instead rely on a condensed short offering document, saving both time and costs. The Listed Issuer Financing Exemption should allow smaller issuers greater access to retail investors and provide retail investors with a broader choice of investments. Equity securities issued in reliance on the exemption will be freely tradeable but subject to a seasoning period that will be satisfied by the company being a reporting issuer in good standing.

If you are involved with a public company and have questions concerning the impending amendments to NI 45-106, please contact Keith Inman at [email protected] or by phone at 250-869-1195.

Keith Inman is a securities and M&A lawyer with broad experience in capital markets. Keith regularly advises individuals and companies with respect to capital raises, securities reporting and compliance matters, purchases and sales of businesses and other corporate/commercial matters. Keith is licensed to practice law in Alberta and British Columbia.