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New Public Company Financing Exemption Will Streamline Process For Raising Capital – Securities



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The Canadian Securities Administrators (the
CSA“) approved a new prospectus
exemption available to public companies listed on a Canadian stock
exchange (the “New Exemption“). The New
Exemption relies on the company’s continuous disclosure record,
as supplemented with a short offering document, and allows a public
company to distribute freely tradeable listed securities to the
public.

The New Exemption allows public companies to issue freely
tradable securities without filing a short form prospectus. This
exemption is expected to benefit public companies, particularly
venture companies, by providing a more cost and time efficient way
to raise money. However, purchasers under this exemption would have
two options for recourse in the event of a misrepresentation
– rights of action under secondary market civil liability and
a contractual right of rescission against the company. Moreover,
under this exemption, public companies and in some jurisdictions,
the executives signing the offering document and the company’s
directors will be subject to statutory liability if the offering
document contains a misrepresentation. As a result, management
needs to be diligent in drafting and preparing the offering
document to avoid any such liability.

The New Exemption will take effect on November 21, 2022 by an
amendment to National Instrument 45-106 Prospectus
Exemptions
.

Eligibility

To rely on the New Exemption, the company must have:

  1. securities listed on the Toronto Stock Exchange, the TSX
    Venture Exchange, the Canadian Securities Exchange or the Aequitas
    NEO Exchange;

  2. been a reporting issuer for at least 12 months in at least one
    jurisdiction in Canada;

  3. filed all timely and periodic disclosure documents as required
    under the continuous disclosure requirements; and

  4. active business operations.

Conditions

The New Exemption is subject to the following key
conditions:

1. News Release and Offering Document

Before soliciting an offer to purchase from a purchaser, the
company must issue and file a news release announcing the offering
and stating that a purchaser can access the offering document for
the distribution under the company’s profile on SEDAR and on
the company’s website, if the company has a website.

The distribution must be completed within 45 days after issuing
the news release.

The company must prepare and file a short offering document
using Form 45-106F19 Listed Issuer Financing Document
(“Form 45-106F19“) containing the
following:

  • details about the offering;

  • the required statement as set out Form 45-106F19;

  • summary description of the business, recent developments,
    material facts and business objectives and milestones;

  • the company’s financial condition;

  • how proceeds will be used;

  • how proceeds from any other offering in the previous 12 months
    were used;

  • involvement of dealers or finders and their fees, if
    applicable; and

  • the purchasers’ statutory rights.

The New Exemption is not available if the company is planning to
use the proceeds for a significant acquisition or restructuring
transaction that would require additional financial statements
under the prospectus rules or for any other transaction that
requires approval of any security holder.

The company is required to report use of the New Exemption
within 10 days after the distribution by filing a Form 45-106F1
Report of Exempt Distribution.

2. Types of Securities

Securities offering under the New Exemption must be listed
equity securities and units consisting of listed equity securities
and warrants convertible into listed equity securities.

3. Total Dollar Amount

Companies will be limited to raising the greater of the
following, to a maximum total dollar amount of $10,000,000: (i)
$5,000,000; and (ii) 10% of the company’s market
capitalization.

4. Statutory Liability

Since the CSA will not be reviewing the offering documents, the
CSA imposed statutory liability on the company. The offering
document would be a core document, forming part of the
company’s continuous disclosure record for the purposes of
secondary market civil liability.

5. Underwriter and Exempt Market Dealer

While investment dealers and exempt market dealers may
participate, there is no requirement for any investment dealer to
be involved.

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.

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