Proposed Companion Policy: NI - 45-101 - Rights Offerings

Proposed Companion Policy: NI - 45-101 - Rights Offerings

Request for Comment National Instrument



COMPANION POLICY 45-101CP
TO NATIONAL INSTRUMENT 45-101
RIGHTS OFFERINGS
TABLE OF CONTENTS


PART 1 PROSPECTUS EXEMPT OFFERINGS
1.1 Notice Under Rights Offering Prospectus Exemption
1.2 Objection to Use of Prospectus Exemption
1.3 Calculation of Number of Securities
1.5 Acceptance of Rights Offering Circular

PART 2 PROSPECTUS OFFERINGS
2.1 Availability of Registration Exemption
2.2 Public Interest

PART 3 PRICING REQUIREMENTS
3.1 Pricing
3.2 Establishing Fair Value If There is no Market Price
3.3 Subscription by Related Parties

PART 4 STAND-BY COMMITMENTS
4.1 Stand-by Commitments

PART 5 DEPOSITORY
5.1 Depository - Junior Issuers in British Columbia

PART 6 OFFERINGS OUTSIDE OF LOCAL JURISDICTION
6.1 Offerings Outside of Local Jurisdiction

PART 7 RESALE RESTRICTIONS
7.1 Resale Restrictions

PART 8 LISTING REPRESENTATIONS
8.1 Listing Representations

 

COMPANION POLICY 45-101CP

 

TO NATIONAL INSTRUMENT 45-101

RIGHTS OFFERINGS(1)

PART 1 PROSPECTUS EXEMPT OFFERINGS

1.1 Notice Under Rights Offering Prospectus Exemption - The securities regulatory authority or regulator will consider thefollowing as the notice required to be sent under securities legislation in order to rely on the rights offering prospectus exemption:

1. A draft rights offering circular.

2. The information required to be sent under paragraph 9.1(1)(e) and subsection 9.1(2) of the Instrument in order to rely on theexemption provided in subsection 9.1(1) of the Instrument.

1.2 Objection to Use of Prospectus Exemption

(1) A Canadian securities regulatory authority or regulator may exercise its statutory power to object to a rights offering being madein reliance on the rights offering prospectus exemption if(2)

(a) the rights offering is for the purpose of financing the reactivation of a dormant or inactive issuer;

(b) the rights offering is for the purpose of financing a material undertaking that would constitute a material departure from thebusiness or operations of the issuer as at the date of its last annual financial statements(3);

(c) the rights offering is not open for a sufficient period of time to permit a rightholder to make a reasoned decision; for this purpose,the Canadian securities regulatory authorities generally consider 21 days to be a sufficient period of time;

(d) excessive consideration is payable to the managing dealer, to any soliciting dealer or for a stand-by commitment; or

(e) the securities regulatory authority or regulator believes that, in the circumstances, reliance upon the exemption is not otherwiseappropriate.

(2) Despite paragraph 1.2(1)(a), the regulator in British Columbia will generally not object to the use of the rights offeringprospectus exemption solely on the basis of the circumstances described in that paragraph.

1.3 Calculation of Number of Securities

(1) In calculating the number of outstanding securities for purposes of paragraph 1 of section 2.2 of the Instrument the Canadiansecurities regulatory authorities are of the view that

(a) the number of securities issued by the issuer upon the exercise of rights issued in reliance on the rights offering prospectusexemption during the 12 months before the date the rights offering circular prepared for the proposed rights offering is sent to thesecurities regulatory authority or regulator should be added to the maximum number of securities that may be issued upon theexercise of rights under the proposed rights offering in determining whether the 25 percent limit described in paragraph 1 of section2.2 of the Instrument has been exceeded so that if

x = the number of securities of the class of the securities that may be or have been issued upon the exercise of rights under all rightsofferings made by the issuer in reliance on the rights offering prospectus exemption during the previous 12 months;

y = the maximum number of securities that may be issued upon exercise of rights under the proposed rights offering; and

z = the number of securities of the class of securities that is issuable upon the exercise of rights under the proposed rights offeringthat are outstanding as of the date of the rights offering circular prepared for the proposed rights offering that is delivered to thesecurities regulatory authority;

then must be equal to or less than 0.25; and

(b) it is inappropriate to exceed the 25 percent threshold in paragraph 1 of section 2.2 of the Instrument if securities convertible intothe securities issuable on the exercise of the rights are likely to be converted within a short period of time after the rights offering.Therefore, unless it is reasonably expected that convertible securities will not be converted before 12 months after the date of therights offering, the potential increase in outstanding securities should be calculated as if the conversion of convertible securities hadoccurred(4).

(2) The formula suggested in subsection (1) should be adjusted to take into account any concurrent rights offering.

1.4 Information Relating to Business - Form 45-101F provides that the issuer must provide information relating to its business.The British Columbia Securities Commission and the Alberta Securities Commission may require junior issuers to provide moredetailed information relating to their business if the information provided in the draft rights offering circular or in the annualinformation form for the issuer is not, in its view, sufficient to provide securityholders with a reasonable sense of the issuer'sbusiness. For example, in the case of a natural resource issuer in the exploration phase, the British Columbia Securities Commissionmay request that the description of the business indicate what properties the issuer holds, the recent costs incurred by the issuer onthe property, the proposed plans for the property, including costs and time frames, and any business risks associated with theexploration of the property. As an additional example, in the case of an industrial issuer that is a high tech or biotechnology issuer,the British Columbia Securities Commission may request that the description of the issuer's business indicate the product or servicethat the issuer is developing, providing or marketing, the stage of development of the product or service, the proposed developmentplans and any business risks associated with those plans.

1.5 Acceptance of Rights Offering Circular - The delivery of information relating to the securities that is accepted by aCanadian securities regulatory authority or regulator will be confirmed in writing to the issuer by the Canadian securities regulatoryauthority or regulator.

PART 2 PROSPECTUS OFFERINGS

2.1 Availability of Registration Exemption - If an issuer proposes to effect a rights offering by way of prospectus, the rightsoffering registration exemption continues to be available to the issuer. The Canadian securities regulatory authorities will notordinarily object to the use of the rights offering registration exemption in that case.

2.2 Public Interest - A regulator may refuse to issue a receipt for a prospectus filed for a rights offering under which rights areissued if the rights are exercisable into convertible securities and the securities underlying the convertible securities are not qualifiedunder the prospectus. This will ensure that the remedies for misrepresentation in the prospectus are available to the person orcompany who pays value.

PART 3 PRICING REQUIREMENTS

3.1 Pricing - Section 5.1 of the Instrument requires the issuer of rights to confirm that the subscription price is less than the marketprice of the securities to be issued upon the exercise of the rights on the day before the subscription price is established. ACanadian securities regulatory authority or regulator will consider granting an exemption from this provision if the issuer satisfies theCanadian securities regulatory authority or regulator that there are valid business reasons for establishing a subscription price that isequal to or greater than the market price of the securities.

3.2 Establishing Fair Value If There is no Market Price - Subsection 5.2(1) of the Instrument provides that if there is nomarket price for the securities issuable on the exercise of rights, the issuer must satisfy the Canadian securities regulatory authorityor regulator that the subscription price is less than the fair value of the securities to be subscribed for under the rights. For thispurpose the Canadian securities regulatory authority or regulator will consider as evidence of the fair value such things as fairnessopinions, valuations and letters from registered dealers.

3.3 Subscription by Related Parties - If no market exists for the securities issuable on the exercise of the rights, subsection5.2(1) of the Instrument does not necessarily preclude a related party from exercising rights under a rights offering. Related partiesmay subscribe for securities issuable on the exercise of rights to maintain their proportionate interest in any class of securities andavoid any dilution. A related party may not, however, exercise its rights to increase its proportionate interest in the issuer. Since themaximum number of securities or amount of securities that a related party may acquire under a rights offering will not be known untilit is determined how many rights are exercised by non-related parties, issuers relying on subsection 5.2(1) will need to put in place amechanism to "claw back" securities subscribed for by related parties in certain circumstances, such as when the rights held bynon-related parties are not fully exercised or have been traded to related parties.

PART 4 STAND-BY COMMITMENTS(5)

4.1 Stand-by Commitments - In assessing if a person or company providing a stand-by commitment has the financial ability tocarry out its obligations under the commitment a Canadian securities regulatory authority or regulator will consider

(a) a statement of net worth attested to by the person or company making the commitment;

(b) a bank letter of credit;

(c) the most recent annual audited financial statements of the person or company making the commitment; and

(d) any other evidence that provides comfort to the Canadian securities regulatory authority or regulator.

PART 5 DEPOSITORY - JUNIOR ISSUERS IN BRITISH COLUMBIA

5.1 Depository - Junior Issuers in British Columbia - The British Columbia Securities Commission may, in certaincircumstances for the purposes of reducing the cost of raising financing by a junior issuer, grant relief from the provision in section8.1 of the Instrument, to permit the registrant who is acting as managing dealer, or if there is no managing dealer, a soliciting dealer,to be the depository instead of a Canadian chartered bank or trust company.

PART 6 OFFERINGS OUTSIDE OF LOCAL JURISDICTION

6.1 Offerings Outside of Local Jurisdiction

(1) A Canadian securities regulatory authority may consider taking appropriate action, such as the denial of exemptions, issuance ofa cease trade order or other sanctions, against an issuer and its directors and officers if securityholders resident in its jurisdiction areexcluded from a rights offering that is made by an issuer that is

(a) a reporting issuer; or

(b) not a reporting issuer but has securityholders resident in its jurisdiction either

(i) representing five percent or more of the holders of the securities of the class that are to be issued on the exercise of rights underthe rights offering; or

(ii) holding five percent or more of the securities of the class that are to be issued on the exercise of rights under the rights offering.

(2) The Canadian securities regulatory authorities recognize the difficulty of determining beneficial ownership given the book-basedsystem of holding securities. The Canadian securities regulatory authorities are of the view that the issuer should use reasonableefforts to determine the jurisdictions in which its shareholders are resident. Such efforts could include requesting a shareholders' listand participants' list from the issuer's transfer agent and requesting the transfer agent to request that each participant provideinformation on the aggregate number of shareholders for which the participant holds securities in each jurisdiction and thepercentage of securities of the class held by the shareholders in each jurisdiction.

PART 7 RESALE RESTRICTIONS

7.1 Resale Restrictions - Issuers are referred to Canadian securities legislation for resale restrictions and exemptions to theserestrictions for the resale of the rights and the securities issued on the exercise of the rights on extra-provincial stock exchanges incertain circumstances.

PART 8 LISTING REPRESENTATIONS

8.1 Listing Representations - A securities regulatory authority's or regulator's written permission to a listing representationcontained in a rights offering circular or a prospectus is evidenced by the acceptance of the rights offering circular or the issuance ofa receipt for the prospectus by the securities regulatory authority or regulator.(6)


Footnotes

1. This proposed Companion Policy is expected to be adopted as a policy in all jurisdictions represented by the CSA.

2. Item (b) of this list is restated from Ontario Securities Commission Policy Statement No. 6.2. Part III paragraph (3).

3. The experience of staff at the Ontario Securities Commission has been that the term "major new undertaking" in OntarioSecurities Commission Policy Statement No. 6.2 created considerable confusion and accordingly an effort has been made to definethe concept more particularly. This concept is intended to capture both qualitative and quantitative matters.

4. This provision is intended to include in the calculation of the 25 percent threshold those securities which may be issued onconversion within one year, other than securities for which it is reasonably expected that the conversion will not occur within the12-month period. Accordingly, unless the conversion is unlikely to take place within one year of the date of the rights offering, theCanadian securities regulatory authorities will look through the issuance of the convertible security to the potential issuance ofunderlying securities.

5. This requirement is based upon a requirement of the British Columbia rights offering regime. It is intended to provide aprotocol for the assessment of financial capacity.

6. This procedure has been established so that the securities regulatory authority's or regulator's non-objection to the use of theprospectus exemption or, if applicable, confirmation of the securities regulatory authority's or regulator's approval of the rightsoffering circular or receipt of a prospectus, constitutes the written permission of the regulator for the offering circular or prospectusto contain representations about the listing of securities in accordance with securities legislation. (In Ontario subsection 38(3) of theSecurities Act (Ontario).)