Rethinking the Rights Offering: Proposed Amendments to the Current Prospectus Exemption

December 19, 2014

A rights offering is a seldom-used means of raising capital, the current requirements of which make it wholly impractical. Under a rights offering, an issuer distributes rights to an issuer’s existing security holders. The rights entitle holders to purchase additional securities of the issuer, generally at a discounted price. Under the current system, an issuer would need to file a prospectus to qualify the rights for distribution, unless the issuer is able to meet the conditions set out in the current prospectus exemption (the “Current Exemption“). These conditions include the preparation of an extensive rights offering circular, which circular must be reviewed and accepted by the relevant securities regulators before the offering can begin. The preparation of the circular and the regulatory review process can add significant time and cost to a financing.  Further, the scope of a rights offering is limited under the Current Exemption – issuers are restricted from issuing more than 25% of their outstanding securities under the exemption in any 12-month period.  These conditions result in issuers rarely using the Current Exemption and the Canadian Securities Administrators (the “CSA“) have published for comment proposed amendments to the Current Exemption, to offer issuers a practical, efficient and cost-effective option for raising capital.

The proposed changes to the rights offering prospectus exemption will simplify and streamline the process by which rights offerings can be used.  A summary of some of the key changes is set forth below.

Availability of the Exemption

The prospectus exemption proposed by the CSA (the “Proposed Exemption“) would only be available to reporting issuers (other than investment funds that are subject to National Instrument 81-102, which are prohibited from issuing rights).  The CSA believes that the Circular (see discussion below) would not provide the security holders of non-reporting issuers with sufficient disclosure about the issuer and its business to make an informed investment decision.

Disclosure and Regulatory Review

Notice: The CSA proposes that an issuer would be required to file and deliver to security holders a notice containing basic information about the rights offering and informing security holders how to access the rights offering circular electronically (the “Notice“).  It is anticipated that the Notice would be one or two pages long.

Circular: Concurrently with the filing of the Notice, the issuer would be required to file a completed rights offering circular in the prescribed form (the “Circular“).  The prescribed form is in “question and answer” format, which is intended to be easier for issuers to prepare and more straightforward for investors to understand. The required disclosure focuses on information about the rights offering, the use of funds available and the financial condition of the issuer; information about the issuer’s business, including technical disclosure for mining issuers, would not be required. The issuer would be required to certify that the Circular does not contain any misrepresentations. The Circular would not have to be mailed to security holders. 

Review: A review of the Notice and Circular by CSA would not be required, nor would the completion of a rights offering be subject to acceptance by the CSA.  For a period of two years from the adoption of the Proposed Exemption, CSA staff in certain jurisdictions intend to conduct reviews of Circulars (in most cases, on a post-distribution basis) to understand how issuers are using the Proposed Exemption and to ensure that issuers are complying with the conditions of the Proposed Exemption.

Increased Dilution Limit

The Proposed Exemption provides for a dilution limit of 100%, assuming the exercise of all rights issued under the Proposed Exemption during the preceding 12 month period. This represents a substantial increase from the 25% dilution limit under the Current Exemption.

Pricing and Resale

Pricing: Listed issuers would be required to set the exercise price for the rights lower than the market price of the underlying securities at the time of the filing of the Notice.  Unlisted issuers would be required to set the exercise price for the rights lower than the fair value of the underlying securities at the time of the filing of the Notice, although this restriction would not apply if insiders of the unlisted issuer are restricted from increasing their proportionate interest in the issuer, whether through the offering or through a stand-by commitment.

Resale: The Proposed Exemption would be subject to a seasoning period on resale, meaning that, in most situations, there would be no hold period.  Also see “Stand-by Commitments – Resale”, below. 

Stand-by Commitments

General: Stand-by commitments are permitted under the Proposed Exemption, subject to certain requirements, such as confirmation from the issuer that the stand-by guarantor has the financial ability to carry through on the stand-by commitment.

Resale: Securities taken up by the guarantor under the stand-by commitment would be distributed under a separate exemption (the “Stand-by Exemption“) and would be subject to a four month hold period.  The CSA is considering whether securities acquired under the rights offering (that is, under the Proposed Exemption) by a stand-by guarantor who is also a current security holder of the issuer, should be subject to a four month hold period, as opposed to being subject to the seasoning period that will apply to security holders who are not also acting as stand-by guarantor. 

Security Holder Protection

Pro-rata Offering: Under the Proposed Exemption, the issuer must make the basic subscription privilege available on a pro rata basis to each security holder of the class of securities to be distributed on exercise of the rights.

Statutory Liability: In the event that the issuer’s continuous disclosure, including the Circular, contains a misrepresentation, an investor would have a right of action against the issuer.  This right of action would be prescribed in each Canadian jurisdiction’s local securities legislation.

Comments in respect of the Proposed Exemption, and other related proposed amendments, are being accepted by the CSA until February 25, 2015.


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