The securities regulatory authorities in British Columbia, New Brunswick and Saskatchewan (the Jurisdictions) have recently proposed a new exemption (the Proposed Exemption) from the prospectus requirements under securities laws that may provide retail investors greater access to the exempt market, while increasing the options available to issuers to raise capital from the public.
Currently, participation in private placements is generally limited to certain insiders or close friends or other individuals related to insiders, as well as accredited investors (who are sophisticated and wealthy investors).
The Proposed Exemption would, subject to certain conditions, allow issuers listed on a Canadian exchange to raise money by distributing securities to any investor who has obtained suitability advice about the investment from a registered investment dealer. This could significantly expand the group of available purchasers in a private placement, as the investor does not need to meet any additional conditions or qualifications to permit their participation in a private placement. The rationale for the exemption is that the investor would receive sufficient protection from the know-your-client, know-your-product and other obligations of the investment dealer under securities laws.
Conditions of Use
The Proposed Exemption involves a number of conditions, largely applicable to the issuer and relating to the nature of the security being offered, rather than the investor.
For the Proposed Exemption to be available, an issuer must have a class of securities listed (the Listed Security) on one of the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange or Aequitas Neo Exchange Inc., and its public disclosure record must be current. The private placement must involve either the Listed Security, a unit consisting of the Listed Security and a warrant to acquire the Listed Security, or another security convertible, at the holder's option, into the Listed Security.
An issuer must disseminate a press release announcing the transaction which must include a description of the private placement and the use of proceeds, as well as a statement confirming that there are no undisclosed material facts or material changes in respect of the issuer.
In addition, an issuer must provide the investor with a contractual right of rescission in the event of a misrepresentation in the issuer's public disclosure record, regardless of whether the investor relied on that misrepresentation. If any offering documents are provided to the investor, such as an offering memorandum, the investor must have rights of action in the event of any misrepresentation in that offering document.
Finally, the investor must have obtained advice regarding the suitability of the investment from a registered investment dealer.
The securities issued using the Proposed Exemption would be subject to a four month hold period.
Practical Considerations
The Proposed Exemption is yet another attempt by securities regulatory authorities in Canada to increase the options available to issuers to raise capital from the public without going through the expense and time associated with a prospectus offering. Issuer and investment dealers alike may seek to use the Proposed Exemption as it could expand the pool of potential investors for private placements. Other recent changes include a proposed crowdfunding exemption, an existing security holder exemption, and other recent amendments to National Instrument 45-106.
We would expect that, for a brokered private placement, the lead agent or underwriter would make their registered investment dealers available to retail investors in order to facilitate the offering, as an added service to their investor clients.
Upon review of the practical implications of the Proposed Exemption, the availability of the Proposed Exemption will be somewhat limited as, generally, both the issuer and the investor would need to be resident in one of the Jurisdictions in order for the exemption to be available. In addition, a brokered offering would require an underwriter or agent to be registered in the applicable Jurisdictions, and a registered investment dealer would similarly need to be registered in the applicable Jurisdictions.
Comment Period
The Proposed Exemption is only in draft form, and the securities regulatory authorities in the Jurisdictions are seeking comment from interested parties. The comment period is open until June 15, 2015. There are also some specific items that have been raised for comment, including several questions regarding the Proposed Exemption in the notice, which is available here. Specifically, comments are requested in relation to whether the group of registered dealers who can provide suitability advice should include exempt market dealers and restricted dealers; whether the four month hold period should apply; and whether sufficient investor protection is provided by the investor obtaining suitability advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
