Just days after Canada's flawed rights offering regime made headlines, on November 27th the Canadian Securities Administrators (the "CSA") published for further comment revised proposed amendments that would create a streamlined prospectus exemption for rights offerings by reporting issuers (the "Proposed Amendments"). The Proposed Amendments have been designed to make rights offerings more attractive to reporting issuers by decreasing both the time and costs involved.
In Canada, rights offerings are often viewed by issuers as a last resort because of the associated time, cost and risk. According to the CSA, under the current offering regime, it takes an average of 85 days to complete an offering – including an average of 40 days to obtain approval of the rights offering circular from the regulators. The overall time period to complete a prospectus-exempt rights offering is considerably longer than the time period to complete an offering using other prospectus exemptions or, in some cases, an offering by prospectus. This delay results in increased costs and exposes the issuer to market fluctuations, which create financing risk. In addition, the current exemption restricts issuers from issuing more than 25% of their securities under the exemption in any 12-month period. This dilution limit is generally seen as being too low, restricting the ability of issuers with small market capitalizations from raising enough money under the exemption to make a rights offering worthwhile.
The Proposed Amendments come too late for a group of Canadian investors who expressed outrage after being shut out of a rights offering by Paladin Energy Ltd., a uranium miner based in Australia but also listed on the Toronto Stock Exchange. Under the offering, existing shareholders were given the opportunity to acquire shares of Paladin Energy at a 32% discount to market, but Canadian retail shareholders were excluded from the offering because Paladin Energy chose to complete the offering in Australia instead of Canada, where the regulatory regime for rights offerings will enable them to complete the offering in a fraction of the time. As a result, the Canadian retail shareholders of Paladin Energy will be forced to watch from the sidelines as their positions are significantly diluted.
The Proposed Amendments will shorten the time it takes to complete a prospectus-exempt rights offering by simplifying the rights offering circular and removing the requirement that the offering circular be reviewed and approved by regulators. Under the Proposed Amendments, issuers will be required to prepare and file a new form of offering circular, which the CSA proposes will be in a straightforward question-and-answer format. The offering circular will focus on information about the rights offering, the use of proceeds and the financial condition of the issuer. The CSA is proposing not to require information about the business of the issuer in the offering circular. Issuers will not have to send the offering circular to securityholders. Instead, the Proposed Amendments will require issuers to send a new form of notice to securityholders prior to using the exemption, which would require basic disclosure about the rights offering and include instructions on how to access the offering circular electronically. Under the Proposed Amendments, the regulators will not review the notice or the offering circular prior to use, which will significantly reduce the time that it takes to complete a prospectus-exempt rights offering.
Other highlights of the Proposed Amendments include:
- a significant increase in the dilution limit from 25% to 100%;
- a requirement that the issuer make the rights offering available pro rata to all securityholders of the class of securities being distributed on exercise of the rights;
- a requirement that the securities being distributed on exercise of the rights be lower than the market price (or fair value, in the case of unlisted issuers) of such securities at the time the notice of the rights offering is filed;
- the ability to provide standby commitments subject to certain requirements, such as confirmation and disclosure by the reporting issuer that the guarantor has the financial wherewithal to follow through on the commitment, as well as a hold period for securities acquired under the standby commitment;
- statutory civil liability for secondary market disclosure applicable to the acquisition of securities under a prospectus-exempt rights offering;
- no requirement in the proposed form of offering circular for technical disclosure, which would otherwise trigger the technical report requirement under National Instrument 43-101 – Standards of Disclosure for Mineral Projects.
The CSA notice and proposed amendments are available here. The comment period is open until February 25, 2015.
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