On May 9, 2019 the Canadian Securities Administrators (CSA) published a notice (Notice) and request for comments on the proposed amendments to Part 9 of NI 44-102 Shelf Distributions (NI 44-102) and its accompanying Companion Policy, 44-102CP (44-102CP).
The proposed amendments (Amendments) will generally alleviate the need for issuers to seek exemptive relief which has been historically required to conduct at-the-market (ATM) distributions of equity securities. A copy of the Notice is available on the Alberta Securities Commission website.
ATM distributions are conducted by an issuer through a registered dealer that sells into the trading market on an issuer's behalf pursuant to a distribution agreement. Upon executing the distribution agreement, in addition to completing certain other requirements, the issuer is able to set up a program that enables it to quickly and efficiently access the public equity markets.
If an issuer elects to issue securities under its ATM program, it delivers a written "sell notice" to the program's dealer which specifies the minimum acceptable pricing for the offered shares, a maximum number of shares that may be sold and execution timing.
Purpose of the amendments
The purpose of the Amendments is to facilitate capital raising by reducing the regulatory burden on public companies engaging in ATM distributions. ATM distributions have not been widely used in Canada as a result of, among other things, the need to obtain exemptive relief from certain prospectus requirements and the size and liquidity eligibility requirements for issuers.
Summary of the proposed amendments
Prospectus requirements
Part 9 of NI 44-102 does not currently provide for an exemption from the prospectus delivery requirement in ATM distributions. As such, issuers are required to apply for exemptive relief from certain prospectus-related requirements in order to conduct an ATM distribution. Delivery of a prospectus is not practicable in the circumstances of an ATM distribution because neither the agents nor the selling agents know the identity of the purchasers. The Amendments dispel the prospectus delivery requirement.
Securities legislation in certain provinces provides purchasers with the right to withdraw from an agreement to purchase securities and with remedies of rescission, or in some jurisdictions, revision of the price, or damages if the prospectus, prospectus supplements relating to securities purchased by a purchaser and any amendment thereto are not delivered to the purchaser, provided that the remedies are exercised by the purchaser within the time limit prescribed by securities legislation.
The Amendments remove purchasers' rights to withdraw and to remedies of rescission or, in some jurisdictions, revisions of the price, or damages for non-delivery because prospectus supplements, the accompanying prospectus and any amendment thereto are not delivered in ATM distributions.
Prospectus certificates must be filed in the form required under sections 9.5 and 9.6 of NI 44-102, as applicable. These are forward looking certificates confirming that the ATM prospectus provides full, true and plain disclosure of all material facts relating to the securities distributed under the ATM.
44-102CP requires issuers to disclose on the cover page of their base shelf prospectus that the prospectus may qualify an ATM distribution. ATM distributions cannot be established by shelf prospectus supplements unless the base shelf prospectus meets this requirement.
Size and liquidity requirements
Historically, ATM distributions have limited the number of securities to be issued under one or more ATM distributions to 25% of the daily trading volume of securities of that class. Further, aggregate ATM distributions under a single prospectus supplement are limited to 10% of the market value of the securities.
The CSA has proposed two different approaches to address size and liquidity requirements of issuers conducting ATM distributions. Each approach is subject to comments and the CSA will implement one of the two options upon review of all comments received.
Option 1: Limit ATMs to liquid issuers only
The first approach limits ATMs to circumstances where the aggregate number of securities distributed on any trading day does not exceed 25% of the trading volume of that class on all marketplaces on that day (25% Daily Cap), or where the securities are "highly liquid securities". "Highly liquid securities" are securities that trade an average of at least 100 times per trading day and with an average trading value of at least $1 million per trading day during a 60-day period ending not more than 10 days prior to the ATM distribution (Highly Liquid Securities).
The 25% Daily Cap is typically imposed in ATM exemptive relief orders to reduce the risk of the ATM distribution having a material effect on the price of the securities being distributed. This risk is also reduced where the ATM involves distribution of Highly Liquid Securities since it is likely that dilution will negatively affect the share price.
Option 2: Remove all liquidity requirements
The second approach removes both the 25% Daily Cap, and the Highly Liquid Securities requirement. The CSA is willing to remove these liquidity requirements because issuers are already incentivized not to conduct ATM distributions that will materially impact the market price as the result would be a negative effect on share price due to dilution.
Additional amendments
In addition to the changes set forth above, the Amendments:
- Remove the 10% aggregate market value cap on securities distributed under an ATM – this was an impediment to issuers engaging in ATM distributions
- Remove issuers' ability to use ATM distributions to issue instalment receipts convertible into equity securities – there is no market demand for such issuances
- Permit non-redeemable investment funds and certain exchange-traded mutual funds to make ATM distributions
- Eliminate the monthly reporting requirement for issuers issuing Highly Liquid Securities provided the necessary disclosure is included in the issuer's continuous disclosure documents
- Recognize news releases that disclose material facts and which are identified as such, as a mechanism for incorporating material facts into an ATM distribution prospectus
Implications
The Amendments will reduce the regulatory burden on issuers by removing the need for issuers to apply for exemptive relief to conduct ATM distributions. This could increase the frequency of ATM distributions in Canada, however, the CSA's decision on whether to implement or remove the 25% Daily Cap or the Highly Liquid Securities test will play a large role in the outcome. Imposing the liquidity requirements will make ATM distributions more difficult for small to mid-size issuers, while removing the liquidity requirements will increase accessibility.
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.
