Based ten minutes from the U.S. – Canadian border, we do a significant amount of cross-border work. From time to time we will release updates on developments in Canadian law affecting our business clients in both countries.
Canadian securities regulations are moving in the direction of facilitating private placement investments in Canada. These changes may be interesting to companies in the U.S., especially given the current tightness in venture capital investment. We expect these changes to strengthen private placement investment channels in Canada, offering options to U.S. companies looking for equity investment.
It is common for start-up and emerging growth companies in Canada to list their shares on an exchange early in their development. Often a listing is undertaken as part of an initial third party investment. This practice is grounded in the long-standing tradition of “junior” mining companies listing their shares on the TSX Venture Exchange while still in an exploratory stage. This article, and a second article to follow in our next Newsletter, talks about developments in Canadian securities regulation that are aimed at facilitating private placements in Canada. These developments may be of interest to U.S. early-stage companies as well.
Peterson McVicar LLP
We often work closely with Peterson McVicar LLP in Toronto, a specialized securities law firm with a robust practice that includes clients whose shares are listed in Canada as well as the U.S. They gave us an excellent summary of the new Listed Issuer Financing Prospectus Exemption (the “Exemption”) which took effect in Canada in 2022. Companies that are, or become, reporting companies in Canada can more seamlessly undertake private placements in Canada. These new exemptions may be of interest to emerging U.S. companies looking to access Canadian capital markets.
Simply put, the Exemption will allow issuers with an established continuous disclosure record in Canada to more efficiently raise capital. Generally, that means that the issuer has shares listed on an exchange in Canada. Subject to the requirements detailed below, an issuer’s pre-existing continuous disclosure record need only be supplemented by a short offering document, which will not be reviewed by securities commissions, before the issuer may raise between CND$5,000,000 and CND$10,000,000 in any 12-month period.
Additionally, securities offered under this exemption are freely and immediately tradeable. In contrast, private placements in the U.S. where the securities are not subsequently registered with the SEC, typically carry a hold period of 6 to 12 months.
Who may take advantage of the Exemption?
In order to use the Exemption:
- The issuer must have been a reporting issuer in a Canadian jurisdiction for the 12 months immediately before the filing of the offering’s kick-off news release;
- The issuer must have listed equity securities on a Canadian exchange (the TSXV, the TSX or CSE);
- The issuer cannot be a shell or blank check company at any time during the 12 months immediately before the filing of the offering’s kick-off news release;
- The issuer must not be an investment fund;
- The total amount of funds which may be raised within any 12-month period under this exemption is between CND$5 million and CND$10 million, depending on the issuer’s listed market capital; and
- All distributions under the Exemption within the last 12-month period, when taken together with the distribution then being made in the private placement, may not dilute the issuer’s listed equity securities by more than 50%.
What disclosure and documentation are required?
Before soliciting an offer to purchase under the Exemption, an issuer must have filed the following:
- All required periodic and timely disclosure documents required in Canada;
- A news release announcing the offering and containing prescribed language;
- A completed Form 45-106F19 (the “Form”), being the new Listed Issuer Financing Document, which must also be posted on the issuer’s website (should the issuer have one).
The Offering itself must close within 45 days of the initial news release.
What must the 45-106F19 Form contain?
The Form should be concise, easy to understand and in plain language. It should be no longer than five pages and generally build upon the body of information already made public by the issuer. To this end, the Form is structured as a simple Q&A with general questions serving as headings. It must contain such items as:
- All Material facts about the securities being offered;
- The amount and source of the funds available to the issuer after completion of the offering;
- How the issuer will use the funds described; and
- A certificate confirming that the Form, together with the issuer’s continuous disclosure record for the last 12 months (or longer if the most recent annual financial statements were filed more than 12 months ago), contains disclosure of all material facts about the securities being offered and does not contain a misrepresentation.
What kinds of securities may be distributed under the Exemption?
Only listed equity securities and units consisting of listed equity securities and warrants convertible into listed equity securities may be distributed under the Exemption. The Exemption may not be used to distribute subscription receipts, special warrants, convertible debentures, etc.
Who may purchase securities under the Exemption? Is an underwriter required?
There are no restrictions: anyone may purchase securities offered under the Exemption. No underwriter or registrant is required to be engaged.
What resale restrictions burden securities distributed under the Exemption?
No resale restrictions will attach to securities distributed under the Exemption: they are freely tradeable.
How much capital may be raised under the Exemption?
While there is no formal minimum offering, the issuer must reasonably expect that it will have sufficient available funds to meet its business objectives and liquidity requirements for 12 months following the distribution. This could require an issuer to raise a minimum amount, depending on circumstances.
While the Exemption is capped at CND$10 million, other exemptions are available for larger offerings. However, the exemptions available for larger offerings are not as flexible.
What Stock Exchange discount pricing regime will apply to securities offered under the Exemption?
The TSXV has indicated that the private placement share price to investors should follow the TSXV discount rules. Other Exchanges have not made an indication, but we expect them to follow the TSXV.
Do any marketing restrictions apply to distributions under the Exemption?
No solicitation of interest may occur prior to the issuance and filing of a press release (the “kick-off news release”) and filing of the Form (described below). The kick-off news release must include the following statement: “There is an offering document related to this offering that can be accessed under the issuer’s profile at www.sedarplus.com and at [website address of the issuer]. Prospective investors should read this offering document before making an investment decision.” If the issuer maintains a website, the Form must be posted to it. If there will be a corresponding offering in the United States, you should consult your U.S. counsel. In most cases, any advertising of a private offering conflicts with the requirements of Regulation D (the primary safe harbor for exemptions from registration under the Securities Act). This is an area where Canadian and U.S. regulations are not consistent.
How is the usage of proceeds restricted under the Exemption?
The issuer may not allocate available funds to the following:
- A significant business acquisition;
- A restructuring transaction; or
- Any other transaction for which the issuer is obligated to seek approval from its security holders.
What is the required timeline for an offering under the Exemption?
The Form must be filed no later than 3 days following the date of the Form. The final closing of an offering under the Exemption must occur no later than 45 days after the date of the kick-off news release.
What liabilities does the issuer bear in an offering under the Exemption?
Purchasers under the Exemption will have the same rights as purchasers in the secondary market for misrepresentations contained in the short offering document and/or in the 12-month continuous disclosure record, as the offering document will constitute a “core document”. In addition, purchasers under the Exemption will have a right to rescind the purchase for 180 days should there be any misrepresentation, similar to prospectus offerings.
The offering document will not be reviewed by regulators. Therefore, it is essential that thorough disclosure is provided independently by the issuer. Since the Form is shorter and less comprehensive than other offering documents, and disallows incorporating information by reference, it may be wise to include pointers to relevant parts of the issuer’s disclosure record.
What liabilities does a dealer bear in an offering under the Exemption?
Dealers are required to conduct their own due diligence investigations.
What are the US considerations for this new exemption?
- The press release announcing the offering should be reviewed by US counsel. It should not be released in the U.S. as private placement exemptions in the U.S. generally disallow any public announcement or advertising.
- The approach toward posting the offering document on the issuer’s website would need to be considered, including whether the issuer should use some form of geofencing technology, mandatory questionnaires or other means to prevent the general public in the United States from accessing the offering document on the website.
- The typical U.S. offering language would need to be included in the offering document or in some kind of wrap around the offering document that is used for purposes of the U.S. portion of the offering (if any). There would need to be a subscription agreement to be completed by U.S. investors (if any), to confirm the availability of the U.S. exemption (such as accredited investor status).
- Any underwriters, agents or finders that are paid fees or commissions on U.S. sales must be registered in the U.S. (federally and with the applicable state).
- Any applicable U.S. post-closing filings or state securities law notices would need to be made in the U.S. If Regulation D is used as the U.S. exemption, a Form D would be filed with the SEC.
Small-cap companies looking to list their shares have a number of options. One option is to list in Canada on the TSXV and cross list on the Pink Sheets in the U.S. A Pink Sheet listing (depending on the trading board) does not require registration with the SEC. Generally, continuing disclosure documents submitted to securities regulators in Canada will satisfy Pink Sheet (OTCQB) ongoing disclosure requirements.
This article is a descriptive overview, only. It should not be relied upon as legal advice. For more information about any of the topics covered herein, contact Jon Gardner at Kavinoky Cook LLP or Dennis Peterson at Peterson McVicar LLP