CSA Notice & Request for Comment – Proposed Amendments to NI 45-106 Prospectus Exemptions to Introduce the Listed Issuer Financing Exemption

October 26, 2021

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CSA Notice & Request for Comment – Proposed Amendments to NI 45-106 Prospectus Exemptions to Introduce the Listed Issuer Financing Exemption 

Letter Summary:

The CSA’s proposed new prospectus exemption would be limited to sales of specified securities of reporting issuers that are already listed on a Canadian stock exchange, and that have been reporting issuers for at least 12 months. It is premised on the issuer having up to date public disclosure. It would require the issuer to prepare a short update offering document with prescribed information, including any new developments in the issuer’s business and confirmation that it will have sufficient funds for at least 12 months. Before soliciting purchasers, issuers would have to file a news release about the distribution and the offering document. There is a proposed offering limit of the greater of $5 million or 10% market cap to a maximum of $10 million. In addition, the offering can not result in more than 100% dilution for existing shareholders. The exemption could not be used by issuers whose principal assets are cash or its exchange listing, nor by an issuer that intends to use the proceeds for a significant transaction such as an acquisition that would require shareholder approval. Purchasers would have rights under the secondary market civil liability regime, and a contractual right of rescission against the issuer for a period of 180 days in the event of a misrepresentation. The issuer would be required to report sales by filing an exempt trade form but would not be required to complete the schedule that contains the names of the purchasers. The exemption is intended to facilitate offerings for issuers instead of using a short-form prospectus. The securities issued pursuant to the exemption would not be subject to any hold period.

Overview of the Council’s Comments:

The CAC supports efforts to eliminate unnecessary barriers to capital raising while maintaining investor protection mechanisms and directionally support the CSA’s intent to create a new prospectus exemption for reporting issuers already listed on a Canadian stock exchange (the “Listed Issuer Financing Exemption”) which is premised on the issuer having an up-to-date continuous disclosure record. The proposed Listed Issuer Financing Exemption seems to generally strike a balance between introducing a lower-cost prospectus exemption and reasonable conditions that protect investors. The CAC believes that issuers should be held to the higher prospectus-level standard for misrepresentation in connection with the exemption.

The exemption provides two options for recourse if there is a misrepresentation, namely a right of action under the existing secondary market civil liability regime, and a contractual right of action against the issuer for rescission. The CAC also believes the standard of prospectus liability should also be applied against the issuer’s continuous disclosure record at time of offering in order to ensure that the issuer has sufficient incentive to ensure full, true and plain disclosure.

The CAC expects that many issuers will utilize the services of a dealer in connection with the Listed Issuer Financing Exemption in order to reach the broadest possible number of investors and highlighted that Regulators should carefully monitor issuers that engage in direct distribution or marketing efforts without a registrant, to help determine if additional supervision or policy work is required in this area.

In our letter, the CAC provided responses to the specific questioned posed and those respective responses can be found in the complete comment letter. The CAC did reference The Capital Markets Modernization Taskforce Final Report dated January 2021 (the Taskforce Report) which included a recommendation to introduce a prospectus exemption similar to what is being proposed by the CSA Proposed Amendments. The Taskforce Report suggested that issuers who adopt semi-annual reporting should not be permitted to use the prospectus exemption recommended in the Taskforce Report. The CAC reiterated that we are not in support of the introduction of a semi-annual reporting regime, for reasons relating to the continuity, timeliness and reliability of an electing issuer’s continuous disclosure record, concerns that would seem to underlie this question. For these reasons, were a semi-annual reporting regime created in the future, the CAC does not believe that this exemption should be available to those electing issuers, as it would compound the challenge of maintaining a complete continuous disclosure record and increases the risk that investors would make an investment decision on stale or incomplete disclosure.