Venture Issuers: Offerings to Existing Shareholders

A group of Canada’s securities regulators is proposing a new prospectus exemption that would allow issuers listed on the TSX Venture Exchange (TSX-V) to sell securities to their existing security holders without an offering document. Unfortunately, the proposed new exemption does not advance the cause of harmonizing Canada’s securities laws since regulators in Ontario and Newfoundland and Labrador are not participating in the proposal.  

Features of the Proposed Private Placement Exemption

The proposed exemption would be available for offerings of securities to a venture issuer’s existing security holders, provided the class of securities is already listed on the TSX-V. A news release announcing an offering would have to disclose the issuer’s planned use of proceeds. Other features of the proposed exemption are as follows:

• For each issuer, the investment limit would be $15,000 per investor per 12-month period, except for investors who obtain suitability advice from a registered investment dealer.
   
• The issuer would have to confirm that each investor was a security holder as of the record date.
   
• In the subscription agreement, the issuer would have to certify that there are no material facts or material changes that have not been generally disclosed. Investors would be able to sue for rescission or damages if any offering document, or the issuer’s continuous disclosure documents, contained a misrepresentation.
   
• The securities would not be freely tradable during the four-month restricted period after closing, under National Instrument 45-102.
   
• There would be no limits on dilution or insider participation, but the private placement rules of the TSX-V would apply, including the rules on pricing securities at a discount to the market price.
   

The proposed exemption does not extend to the dealer registration requirements under securities laws, so some transactions may require engaging a dealer to undertake sales in reliance on the exemption.

The regulators are seeking comment on various aspects of the proposal, including if they should extend the proposed exemption to non-venture issuers, if the exemption should be available only to investors who have been security holders for a specified minimum period of time, and if venture issuers should be required to prepare an annual information form to take advantage of the exemption.

Separate Ontario Initiatives

One objective of the proposed new exemption is promoting investment opportunities for retail investors, but since the Ontario Securities Commission (OSC) has not joined in the proposal, Ontario investors will be excluded, and sales to them would have to comply with another prospectus exemption, such as the accredited investor exemption or the exemption for investments of at least $150,000. Neither of those exemptions is tailored to retail investors; however, the OSC is considering a crowdfunding exemption, an exemption for sales of securities to family, friends and business associates and an offering memorandum exemption, all of which would facilitate investment opportunities for Ontario retail investors.

The OSC is also considering two possibilities concerning rights offerings. First, the existing exemption may be streamlined, as recommended in a TMX proposal, to shorten the regulatory review period, increase the dilution ceiling and shorten investors’ exercise period. Second, the OSC is considering a prospectus exemption for sales by an issuer to existing security holders without an offering document in reliance on the issuer’s continuous disclosure record—very similar to what the other securities regulators have just proposed. With the other regulators apparently moving forward without Ontario’s participation, it is unclear whether any final rules will ultimately be harmonized across the country.