The Canadian Securities Administrators (CSA) have published final amendments to National Instrument 44-102 Shelf Distributions (NI 44-102) that will streamline “at-the-market” (ATM) equity distributions in Canada effective August 31, 2020 (the amendments).
What you need to know
The amendments eliminate the need for issuers to obtain discretionary exemptive relief that has historically been required by issuers conducting ATM distributions of equity securities.
The amendments also eliminate overall size and daily sales limits that are currently required for ATM distributions, and streamline ongoing reporting requirements.
The amendments bring Canadian ATM rules in line with U.S. rules, making it easier for issuers listed in Canada and the U.S. to adopt a cross-border ATM program.
ATM distributions provide issuers with an ongoing and efficient mechanism to raise equity capital, which may be beneficial to issuers during the COVID-19 pandemic.
What is an “At-the-Market” distribution?
An ATM distribution is a form of prospectus offering that enables an issuer to periodically sell equity securities directly into the market at current market prices through a registered dealer who acts as a “placement agent” on behalf of the issuer. In an ATM distribution, neither the dealer nor the issuer engages in any special marketing efforts. Rather, each issuance under an ATM distribution is analogous to an ordinary brokerage transaction. An issuer will typically use an ATM program to issue equity securities in small increments for normal course balance sheet management purposes or if market conditions render other follow-on equity financing alternatives less attractive.
Summary of changes to ATM distribution regime
As a result of the amendments, the CSA will make the following changes to the historical ATM distribution regime effective August 31, 2020:
No exemptive relief requirements–Issuers will no longer be required to apply for discretionary exemptive relief in order to establish ATM programs, as the standard set of exemptive relief (relating to prospectus delivery requirements and statutory withdrawal rights and rights of action) that was historically granted by the CSA as a matter of course will be codified directly into NI 44-102.
Removal of 10% cap on overall size of ATM Program–Currently, NI 44-102 imposes a cap on the overall size of an ATM program to no more than 10% of the aggregate market value of the issuer’s outstanding equity securities of the same class (excluding securities held by insiders). As a result of the amendments, the 10% cap will be eliminated.
No liquidity requirements–Currently, ATM programs typically contain a requirement that the aggregate number of equity securities sold on one or more Canadian marketplaces on any trading day must not exceed 25% of the trading volume of the equity securities on all Canadian marketplaces on that day. As a result of the amendments, ATM programs will no longer be subject to the 25% daily limit.
Universal reporting requirements–The CSA will streamline its approach to reporting by allowing all issuers to report distributions under an ATM program on a quarterly basis (current rules require monthly reporting by those issuers that do not satisfy a “highly liquid securities” requirement).
Designated news releases –The amendments recognize the concept of “designated news releases” as a mechanism for incorporating “material facts” into an ATM prospectus. If an issuer disseminates a news release disclosing information that, in the issuer’s determination, constitutes a “material fact”, the issuer will be required to identify the news release as a “designated news release” for the purposes of the ATM prospectus (by identifying it as such on the face page of the news release). An ATM prospectus would also include a general statement that any “designated news releases” will be deemed to be incorporated by reference into the ATM prospectus.
Cover page disclosure–The amendments will require that an issuer disclose on the cover page of its base shelf prospectus that the prospectus may qualify an ATM distribution. Upon the amendments becoming effective, an ATM distribution may not be established by a shelf prospectus supplement unless the corresponding base shelf prospectus has satisfied this new prescriptive disclosure requirement.
The amendments do not address French translation requirements. Accordingly, issuers who are interested in implementing an ATM program, but would not otherwise seek to qualify their base shelf prospectus in the province of Québec, will continue to be required to obtain exemptive relief from the Québec securities regulators in respect of the translation requirements in connection with an ATM program.
As the COVID-19 pandemic continues, stock market volatility may present periodic market windows that quickly close. Issuers that want to be in a position to opportunistically access the equity markets on short notice will be well-served to consider the adoption of an ATM program.
Development-stage issuers and issuers with limited capital resources that are planning to establish an ATM program should consider their eligibility to file and clear a shelf prospectus, with regard to their current cash position and their short-term liquidity (without giving effect to any potential ATM program proceeds).
The amendments align the Canadian ATM distribution rules more closely to the existing ATM distribution regime in the United States. Accordingly, cross-listed issuers that desire the flexibility to access U.S. equity markets may also want to explore establishing a cross-border ATM program. If sales under an ATM program are to be made in the United States, however, it is important to note that the U.S. dealers will want to follow the same sorts of procedures as they would follow in any other registered U.S. public offering, namely conducting due diligence (which may be updated periodically), and receiving “comfort letters” from the issuer’s auditors and “10b-5”, or negative assurance, letters from the issuer’s counsel.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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