Streamlined Rights Offering Regime Proposed by Canadian Securities Regulators

A streamlined rights offering regime has been proposed by Canadian securities regulators with the objective of increasing the appeal of rights offerings as a financing method. Rights offerings are relatively uncommon in Canada at present and are most often done by smaller issuers with limited equity financing alternatives; they typically include a “backstop” subscription commitment from a supportive securityholder. The rule changes would significantly increase the permitted size of prospectus-exempt rights offerings and would remove some of the other regulatory disincentives associated with them. The proposed changes should benefit issuers’ existing smaller investors, because rights offerings generally provide a better opportunity than other types of financings for retail investors to participate and avoid dilution. The comment period for the proposed rules is open until February 25, 2015.

Key Features of the Proposed New Rights Offering Regime

The following are the key features of the proposed prospectus-exempt rights offering regime that would be available to reporting issuers:

• rights offering circulars would not be subject to advance review and clearance by securities regulators;
• circulars would be prepared in a question-and-answer format, including information about the rights offering, the use of proceeds and the financial condition of the issuer;
• business information would not be required in the circular, and mining issuers would not have to include technical information, so they could avoid triggering the technical report filing requirements under National Instrument 43-101 – Standards of Disclosure for Mineral Projects;
• the circular would not have to be delivered to securityholders; instead, a one- or two-page notice could be delivered providing basic disclosure about the offering and informing securityholders of how to access the circular electronically;
• the permitted dilution limit would be increased to 100% from the current 25%;
• for listed issuers, the subscription price would have to be below the market price (this is consistent with current practice and TSX rules, which require pricing at discount levels similar to those established by TSX’s private placement rules); for unlisted issuers, the subscription price would have to be below the fair value of the securities unless insiders are restricted from increasing their proportionate interest in the issuer;
• the basic subscription privilege would have to be available to securityholders on a pro rata basis;
• the exercise period would be a minimum of 21 days and a maximum of 90 days; and
• if the stand-by commitment is from a registered dealer or a party that is not an existing securityholder, it would have to acquire securities as principal and the securities would be subject to a four-month resale hold period.¹

Prospectus-Qualified Rights Offerings

Rights offerings may also be done under a prospectus, although fewer issuers may proceed in this manner if the permitted dilution limit for exempt rights offerings is increased to 100%. The securities regulators are not proposing to change the rules applicable to rights offerings under a prospectus, except that the subscription price would have to be at a discount to the market price.

Rights Offerings by Listed Issuers

The proposed changes to the rights offering regime are significant, but listed issuers would still have to comply with TSX requirements which, among other things, require issuers to submit a draft circular to the exchange for advance review and approval. Achieving the objective of increasing the popularity of rights offerings may depend in part on the extent of conformity between securities law requirements and TSX rules.

Cross-Border Rights Offerings

Rights offerings can be extended to an issuer’s U.S. securityholders, if certain criteria are met, without SEC review and, if the issuer is not already an SEC registrant, without triggering ongoing SEC reporting obligations. The issuer must qualify as a “foreign private issuer” under SEC rules and no more than 10% of its securities may be held by U.S. residents or, if the 10% threshold is exceeded, the issuer must have been listed on the TSX or TSX-V for at least one year and have a three-year Canadian reporting history. The underlying securities are freely tradeable in the United States but the rights are not and may only be sold outside the United States (including over the TSX or TSX-V) in compliance with Regulation S. For issuers that exceed the 10% limit, SEC rules do not contemplate a notice-and-access method for securities offering documents like that being proposed by Canadian regulators for rights offering circulars. These issuers might need to seek SEC relief in order to send U.S. securityholders only the required notice and not the rights offering circular.

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¹ The regulators are contemplating whether they should impose a four-month resale hold period even if the stand-by guarantor is an existing securityholder. This hold period would only apply to securities acquired as part of the stand-by commitment, not securities acquired under the basic subscription