Commentary: Can a company on the TSXV do a financing under 5¢?

The TSX Venture Exchange requires that the offering price for a financing involving the issuance of listed shares be not less than the applicable discounted market price, subject to a minimum price of 5¢ per share. The main reason for this requirement is to limit the number of companies that have an excessively dilutive structure.

The TSXV, however, maintains the discretion to waive the 5¢ minimum on a case-by-case basis.

In light of weak capital markets and the erosion of commodity prices, the share prices of many exploration companies have dropped considerably and made it unlikely for such companies to find investors willing to pay more than what the companies’ shares are trading at.

The TSXV provides guidance as to when it is more likely to waive the 5¢ minimum. Let’s look at two circumstances: a rights offering, and an existing shareholder exemption.

Rights offerings

On Dec. 8, 2015, the rights offering regime underwent significant changes compared to the old regime, through an amendment of the rights offering prospectus exemption in Section 2.1 of National Instrument 45-106 respecting prospectus exemptions.

Here are the main differences between the new and the old regimes:

• The new rights offering exemption now permits a maximum dilution of 100%, rather than just 25% under the old regime.

• Removal of the requirement for a regulatory review prior to using the rights offering circular while replacing it with alternative investor protections, including the addition of statutory secondary market civil liability. This change means that investors under the rights offering will have a right of action if there is a misrepresentation in the rights offering circular or other part of the issuer’s continuous disclosure record.

• Issuers must now file a new notice on SEDAR and send to security holders such notice to inform them about how to access the rights offering circular electronically. A rights offering notice is a “two-pager” in the form prescribed by Form 45-106 F14, which contains summary information about the rights offering with instructions on how to participate and access the rights offering circular electronically.

• Issuers must file a new rights offering circular in the form prescribed by Form 45-106F15. Such a circular is now in a question and answer format that is intended to be easier for issuers to prepare and more straightforward for investors to understand — it must be filed but not sent to security holders.

• The subscription price for a security issued upon exercise of a right must be, for a listed security, lower than the market price (i.e., the simple average closing price of securities of that class on the previous 20 trading days) on the day the rights offering notice is filed.

• The new regime removes the ability of non-reporting issuers to use the rights offering exemption.

• There is no resale restriction applicable to the rights or underlying securities issued.

• The amendments create a new prospectus exemption for stand-by guarantors and modify certain conditions of the minimal connection exemption.

Existing shareholder exemption

On March 14, 2014, the securities regulatory authorities in B.C., Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut adopted a Multilateral Instrument 45-313 respecting prospectus exemption for distribution to existing security holders (the Ontario Securities Commission later adopted such exemption pursuant to Rule 45-501) that grants a prospectus exemption for issuers that wish to raise money by distributing securities to their existing security holders, subject to the following key conditions:

• The issuer must have a class of equity securities listed on the TSXV, the Toronto Stock Exchange or the Canadian Securities Exchange;

• The offering can consist only of a class of equity securities listed on the TSXV, TSX or CSE, or units consisting of the listed security and a warrant to acquire the listed security;

• The issuer must make the offering available to all existing security holders that hold the same type of listed security;

• Unless the investor has obtained suitability advice from a registered investment dealer, the investor can only invest a maximum of $15,000 per issuer under the exemption in a 12-month period;

• The issuer must have filed all timely and periodic disclosure documents as required under applicable securities laws;

• The issuer must issue a news release disclosing the proposed offering, including details of the use of proceeds;

• Each investor must confirm in writing to the issuer that, as at the record date, they held the type of listed security offered under the exemption;

• An investor must be provided with certain rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record; and

• Although an offering document is not required, if an issuer voluntarily provides one, the issuer must file the offering document with the securities regulatory authority and an investor will have certain rights of action in the event of a misrepresentation in it.

The first trade of securities issued under the exemption will be subject to a four-month hold period under Section 2.5 of National Instrument 45-102 Resale of Securities. Please also note that the existing holder exemption has a condition to use the financing to maintain or preserve the corporation’s existing operation, activities and assets. Accordingly, such exemption would not be appropriate if the financing was to be used to acquire new assets or operations.

In conclusion, it is possible for a TSXV company to do a financing at a price lower than 5¢ if specific prospectus exemptions, such as the ones described above, can be used.

These streamlined procedures are not well known by TSXV-listed companies because they are relatively new. They can, however, make the difference between a company that can get a financing to sustain itself during tough economic times and a company that will need to liquidate or reorganize because of a lack of financing and mounting expenses.

— Carole Turcotte is a partner at global law firm Dentons and practices securities, corporate and commercial law from Dentons Canada LLP’s Montreal office.

Carole advises public and private companies as well as securities dealers on various issues, including corporate financings, mergers and acquisitions, corporate reorganizations and restructurings, joint-venture operations, plans of arrangement, takeover bids, reverse takeovers, the protection of minority shareholders in special transactions, stock exchange listings and the drafting of various commercial agreements.

Please visit www.dentons.com for more information.