New Prospectus Exemption for Listed Issuers

Reporting issuers listed on a Canadian stock exchange can use a simplified procedure to raise capital without a prospectus

On November 21, 2022, the new “listed issuer financing exemption” will be in effect.

A foundational principle of securities law is that a prospectus is required for a company to issue securities to an investor, but preparing a prospectus can be a resource-intensive process that can form a barrier to raising capital, especially for smaller companies.

Exceptions to the prospectus requirement are set out in National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”). Recently, Canadian securities regulators added a new exemption to NI 45-106: the listed issuer financing exemption.

The exemption, which takes effect nationwide on November 21, 2022, aims to provide certain listed issuers (companies whose securities are listed for trading on a recognized stock exchange in Canada) with a more efficient way to raise capital by permitting them to raise up to $10 million a year without issuing a prospectus, subject to certain conditions.

Regulators expect that the new exemption will provide smaller listed issuers with greater access to capital, especially through retail investors, while providing investors with more options of companies to invest in.

What the Exemption Allows

Issuers can use the new exemption to raise capital from any person, in an amount up to the greater of $5 million and 10% of the issuer’s aggregate market capitalization (to a maximum of $10 million) per year. There is no minimum offering amount. Securities issued under the exemption are freely tradable.

A prospectus is not required. Issuers rely primarily on their existing continuous disclosure record and on an offering document called the “Listed Issuer Financing Document”.

Listed Issuer Financing Document

The Listed Issuer Financing Document requires the issuer to set out certain disclosure, including information about:

• the securities to be issued in the offering;
• the issuer’s business and objectives, and how the issuer expects to use its available funds to meet those objectives,
• how funds raised under the exemption will be used, and how funds raised in the last 12 months have been used,
• any fees or commissions to be paid in connection with the offering, and
• certain securities law rights of the purchaser.

The Listed Issuer Financing Document is not subject to regulator review. However, it must be concise (regulators expect that generally it will not be longer than five pages) and easy to understand. It also cannot contain a misrepresentation, a fact which must be certified by the issuer’s CEO and CFO at the end of the document.

Eligibility to use the Exemption

• Listed in Canada for at least 12 months – The issuer must currently have its equity securities listed on a Canadian exchange, and must have been a reporting issuer in Canada during the prior 12 months. It cannot be an investment fund.
• Active business operations – The issuer must have active business operations, and its principle asset cannot be cash, cash equivalents, or an exchange listing (capital pool companies, “shell” companies, and SPACs are out). If the issuer completed a restructuring in the prior 12 months, any person or company with which it completed that restructuring must meet the same criteria.
• Up to date disclosure – The issuer must have filed all disclosure required under securities laws.
• Sufficient cash for a year – The issuer must reasonably expect that after closing the offering, it will have funds available to meet its business objectives and liquidity requirements for the following 12 months. If the issuer plans to rely in part on capital raised under this exemption, the issuer must disclose the minimum amount it needs to raise and cannot close the offering until it has done so.
• Equity and warrants only – The securities issued under the exemption must either be listed equity securities, or units comprised only of listed equity securities and warrants exercisable for such securities.
• Disclosure and filings – Before soliciting investment under the exemption, an issuer must file on SEDAR and post on its website a Listed Issuer Financing Document and must issue and file a news release. Within 10 days following a distribution, the issuer must file in each applicable jurisdiction a report of exempt distribution in Form 45-106F1.

Restrictions also apply to how the exemption – and capital raised pursuant to it – may be used:

• An issuer cannot use the exemption to issue securities in any 12-month period which comprise more than 50% of its outstanding securities at the start of that period.
• Funds raised cannot be allocated towards certain activities, including certain restructurings and significant acquisitions, or any other transaction which requires shareholder approval.
• If a material change in the business of the issuer occurs during the pendency of the offering, the issuer must cease the distribution until it has filed an amended Listed Issuer Financing Document.

Purchasers’ Rights of Rescission

If either the Listed Issuer Financing Document or any of the issuer’s disclosure over the prior 12 months contains a misrepresentation, purchasers under the new exemption may either rescind their purchase or exercise a right to damages against the issuer (and potentially other persons as well).

Underwriting and Dealer Registration Considerations

The exemption does not require that purchasers buy the securities through a dealer or underwriter, however the exemption does not provide relief from the dealer registration requirement. Issuers are free to use a dealer, and an issuer should in fact consider whether it, or any selling agents it uses, may be required to be registered as a dealer under the Securities Act.

Since shares issued under the exemption can be freely traded, care must be taken to consider whether any purchasers are acting as underwriters, with the variety of securities law requirements that may entail.

Considerations for Cross-Border Private Placements

Issuers should use caution in relying on the new exemption to offer or issue securities to purchasers in the United Stated. Some key considerations include:

• Exemptions in both jurisdictions: Canadian issuers must ensure they can rely on an exemption on each side of the border in order to offer and sell securities to a purchaser in the U.S.
• Resale restrictions: securities issued under the new exemption are freely tradeable under Canadian rules; however, U.S. resale restrictions may still apply to purchasers in the U.S.
• Availability of Listed Issuer Financing Document on website: the new exemption requires, among other things, that an issuer post on its website the Listed Issuer Financing Document. Consideration should be given to Rule 506(b) of Regulation D under the U.S. Securities Act of 1933, on which Canadian issuers frequently rely to issue securities to U.S. accredited investors, which prohibits general solicitation and general advertising.

Key Take-Aways

Before issuing any securities, an issuer must use a prospectus or find a prospectus exemption.

The listed issuer financing exemption is designed to help smaller public companies raise limited amounts of cash efficiently. It may be especially helpful to generate funds for working capital and other general corporate purposes. Issuers commonly rely on the accredited investor exemption, which has a four-month restricted period, and as a result, investors typically demand a discount to the market price. It will be interesting to see if, because shares issued under this new exemption are freely tradable, issuers will be able to sell their shares with a smaller discount, or no discount at all.

While reliance on the exemption will be less onerous than clearing a prospectus, some thoughtful disclosure must still be prepared and filed, and the issuer retains liability for misrepresentations. This new exemption will hopefully facilitate access to capital for growing companies, while balancing investor protection considerations.