Streamlined Rights Offering Regime Adopted in Canada

Canadian securities regulators are adopting a streamlined rights offering regime with the objective of increasing the appeal of rights offerings as a financing method. Rights offerings have been relatively uncommon in Canada and have most often been done by smaller issuers with limited equity financing alternatives. The rule changes significantly increase the permitted size of prospectus-exempt rights offerings, and circulars will no longer have to be reviewed and cleared by securities regulators. These changes should benefit issuers’ existing smaller investors, since rights offerings generally provide a better opportunity than other types of financings for retail investors to participate and avoid dilution. The new rules are expected to become effective on December 8, 2015.

Key Features of the New Rights Offering Regime

The following are the key features of the new prospectus-exempt rights offering regime.

• The permitted dilution limit will be increased to 100% from the current 25%.
• Rights offering circulars will not be subject to advance review and clearance by securities regulators.
• Stand-by guarantors will not be subject to more onerous resale restrictions than other securityholders. (The regulators dropped their proposal to impose a four-month hold period.) A stand-by guarantor must purchase rights as principal and not as an underwriter or with a view to distribution.
• Circulars will be prepared in question-and-answer format, including information about the offering, the use of proceeds, the issuer’s financial condition and any material information that has not yet been publicly disclosed.
• Circulars will not have to be delivered to securityholders; instead, a one- to two-page notice may be delivered, including basic disclosure about the offering and instructions on how to access the circular electronically.
• Business information will not be required in the circular, and mining issuers will not have to include technical information, thus avoiding triggering the technical report filing requirements under National Instrument 43-101 – Standards of Disclosure for Mineral Projects.
• Consistent with current practice, for listed issuers the subscription price will have to be less than the market price; for unlisted issuers, the subscription price will have to be below the fair value of the securities unless insiders are restricted from increasing their proportionate interest in the issuer.
• The exercise period will remain the same under the new regime: a minimum of 21 days and a maximum of 90 days.
• Consistent with common practice, subscription privileges must be available to Canadian securityholders on a pro rata basis.
• The new regime will not be available to investment funds or non-reporting issuers.

Prospectus-Qualified Rights Offerings

The rules applicable to rights offerings under a prospectus are not being changed, except to impose the same discounted pricing requirement as will apply to prospectus-exempt rights offerings. In any event, the new 100% dilution limit should result in fewer issuers needing to conduct rights offerings under a prospectus.

Rights Offerings by Listed Issuers

Listed issuers will still have to comply with existing stock exchange rules governing rights offerings. This includes the circular being reviewed and pre-cleared by the exchange, and the TSX requires the subscription price to be at a "significant discount" to market—a stricter requirement than the "below market" rule noted above. Achieving the objective of increasing the popularity of rights offerings may depend in part on the extent to which stock exchange requirements are conformed to the new securities law regime.

Cross-Border Rights Offerings

Participation by U.S. Securityholders

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 U.S. but the rights are not and may only be sold outside the U.S. (including over the TSX or TSX-V) in compliance with the SEC’s Regulation S. For issuers that exceed the 10% limit, SEC rules do not contemplate the notice-and-access method for delivering a circular, so these issuers may need to seek SEC relief in order to send U.S. securityholders only the brief notice and not the full circular.    

Issuers with Minimal Securityholdings in Canada

At present, issuers with minimal securityholdings in Canada are exempt from Canada’s rights offering rules, provided that the issuer sends Canadian securityholders the same materials being sent to foreign securityholders and certifies that

• the proportion of the issuer’s securityholders that are Canadian and the proportion of its securities held by Canadians are each less than 10%, and
• the proportion of the issuer’s securityholders resident in a single province or territory and the proportion of its securities held by residents of a single province or territory are each less than 5%.

To make the rights offering regime more favourable to these issuers, the second condition above is being removed, so issuers will only need to meet the Canada-wide 10% tests to extend their foreign rights offerings to Canadian securityholders.