CSA Provides Guidance on Listed Issuer Financing Prospectus Exemption

The Canadian Securities Administrators (CSA) has provided new guidance on the use of the listed issuer financing prospectus exemption (the “Exemption”) in CSA Staff Notice 45-330 – Frequently Asked Questions about the Listed Issuer Exemption (the “Staff Notice”). The Exemption was adopted by all Canadian securities regulatory authorities in November 2022 and allows eligible listed public companies to raise limited amounts of capital by issuing freely tradable listed securities without filing a prospectus. The Staff Notice provides responses to frequently asked questions about the Exemption, as well as observations about offerings that have utilized the Exemption.

The Exemption

The Exemption allows eligible issuers with securities listed on a Canadian stock exchange to raise small amounts of capital by issuing freely tradable listed securities without filing a prospectus. Eligible issuers can raise the greater of $5 million or 10% of the issuer’s market capitalization (to a maximum of $10 million) in a 12-month period, so long as the distributions in any 12-month period do not result in an increase of more than 50% of the issuer’s listed securities during that period (the “Dilution Limit”). To use the Exemption, the issuer must have sufficient funds to meet its business objectives and liquidity requirements for 12 months following completion of the offering (the “Sufficient Funds Requirement”).

Issuers utilizing the Exemption must issue a press release announcing the offering and file a short offering document containing prescribed information, including the details and price of the securities being offered, a brief summary of the issuer’s business and any recent developments, any material facts not otherwise disclosed in the issuer’s public disclosure, and the proposed use of the funds raised.

Further details about the Exemption can be found in our Update, CSA Creates New Exemption to Allow Eligible Listed Public Companies to Issue Freely Tradable Securities Without Filing a Prospectus.

Key Guidance from the Staff Notice

• Sufficient Funds Requirement. The Staff Notice recommends that issuers consider the following factors (in addition to other factors that may be relevant in a particular situation) in determining whether the Sufficient Funds Requirement will be met: (i) the costs of its business objectives for the next 12 months (including the cost related to each significant event that must occur to meet its business objectives), (ii) the issuer’s historic and expected future cash flow from operations, (iii) the issuer’s working capital or deficiency, (iv) any additional committed funding (e.g., a concurrent private placement or an available credit facility), and (v) the costs, including selling commissions and fees, incurred in connection with the offering. An issuer may need to set a minimum size, or increase the size, of an offering to ensure that it will meet the Sufficient Funds Requirement following the offering.

• Bought deals. The CSA express concerns with the use of the Exemption for a firm commitment or “bought deal” offering, including a concern that underwriters may solicit potential purchasers before the issuer issues the news release and files its completed offering document. The CSA has also said that if the underwriters are required to purchase any securities that are not resold under the offering (which is a fundamental feature of a bought deal), those securities could only be resold by the underwriter if they are subsequently qualified by a prospectus or sold in reliance on a prospectus exemption (which may result in the purchaser being subject to a four-month hold period).

• Concurrent Private Placements and Prospectus Offerings. The Exemption is available for use concurrently with other prospectus exemptions. However, an issuer cannot use the Exemption in Quebec concurrently with a prospectus in other provinces because this would allow issuers to avoid translating the prospectus and continuous disclosure documents into French, and would also result in Quebec subscribers having fewer rights than the subscribers in other Canadian jurisdictions purchasing under the prospectus. The Staff Notice does not expressly address whether the Exemption can be used in provinces and territories other than Quebec concurrently with a prospectus offering in other Canadian jurisdictions.
• Multiple Tranches/Closings. An issuer can close an offering using the Exemption in multiple tranches if it satisfies the Sufficient Funds Requirement upon closing the first tranche, and so long as the last tranche closes within 45 days of the offering announcement.
• Eligible Securities. An issuer can issue a listed equity security or a unit consisting of a listed equity security and a warrant to acquire a listed equity security. The CSA states that the Exemption should be available to distribute flow-through shares and charitable flow-through shares, provided that the relevant class of shares is listed on a Canadian stock exchange, and that the end purchaser is named in the report of exempt distribution and has the benefit of all statutory rights under the Exemption. The Exemption would not be available to distribute broker’s warrants that are not listed on a Canadian stock exchange.
• Dilution Limit. When determining whether an offering exceeds the Dilution Limit, an issuer must include common shares that are issuable on the exercise of warrants being distributed under the offering. However, the value of common shares issuable on the exercise of warrants need not be included in calculating the maximum value of securities that may be distributed using the Exemption.
• Securities for Debt. When relying on the Exemption, an issuer cannot solicit an offer to purchase securities before issuing and filing a news release announcing the offering and filing the required offering document. The CSA views this requirement as incompatible with the issuance of securities for debt using the Exemption.
• Issuers in default. An issuer cannot utilize the Exemption if it is in default of securities legislation requirements.

To discuss the Exemption or the guidance in the Staff Notice, please contact any member of our Capital Markets Group.

The authors would like to thank Maddy Cummings, Summer Law Student, for her assistance in writing this Update.