Canada: ATM Update - CSA Clears ATMs For Lift Off

Significant liberalization of the "at-the-market" (ATM) regime was announced by the Canadian Securities Administrators (CSA) on June 4, 2020 and will become effective on August 31, 2020 by way of amendments (Amendments) to National Instrument 44-102 – Shelf Distributions (NI 44-102). The Amendments follow a proposal published in June 2019 as we previously discussed.

Background

Pursuant to the existing ATM provisions of NI 44-102, issuers are currently permitted to issue treasury securities through the facilities of a stock exchange at variable market prices, in varying amounts and on an as-needed basis, all at the discretion of the issuer and its agent. 

However, in order to do so, issuers invariably apply for and receive exemptive relief to address ill-suited prospectus delivery obligations, inapplicable withdrawal and rescission rights and inappropriate prospectus form and certification obligations.

The standard ATM exemptive relief generally imposes certain requirements on issuers:

• Size and liquidity restrictions intended to reduce the risk that an ATM would have a material impact on the price of the securities being distributed (and notwithstanding that issuers and their agents would be motivated by the same concern regardless of any regulatory restrictions), consisting of:
  • a cap on the number of securities of a class distributed on one or more ATMs at 25% of the daily trading volume of securities of that class (the 25% Cap); and
  • a cap on the aggregate distributions under a single prospectus supplement at 10% of the market value of the issuer's securities (the 10% Cap).
• Monthly reporting obligations as to the number and average price of distributed securities and aggregate proceeds raised (the Reporting Obligation).

The Amendments – Reduced Administrative Burden and Maximized ATM Flexibility

Principal Changes

Elimination of need for exemptive relief  – The CSA has codified the relevant terms of the standard ATM exemptive relief in the Amendments, eliminating the need for any applications to the securities regulatory authorities and thereby facilitating more efficient ATM set-up and operation:

• Prospectus Delivery – The requirement to deliver a prospectus does not apply in respect of the distribution of a security under an ATM prospectus.
• Withdrawal and Rescission Rights – Such rights are modified to reflect, among other things, the impact of non-delivery of the ATM prospectus.
• Prospectus Form Changes – The form of prospectus certificate has been modified to reflect the periodic distribution of securities and the full, true and plain disclosure of all material facts relating to the securities being offered as at such times.

Elimination of both 10% Cap and 25% Cap – While the CSA's initial proposal had contemplated an alternative that retained daily volume distribution caps on issuers that did not have "highly liquid securities", the Amendments eliminate the 25% Cap on all issuers regardless of liquidity, reflecting the CSA's confidence that issuers and their agents recognize that it is in their own best interests to minimize the market impact of ATM sales. The CSA expect agents to monitor market reaction to ATM sales on an ongoing basis and, notwithstanding the elimination of the 25% Cap, modify their distribution activities as necessary to ensure no unmanageable downward price pressure.

Relaxation of the Reporting Requirement – The new reporting regime will require only that issuers either disclose: 

• within 60 days of an interim period or 120 days of an annual period in a standalone report; or
• in their interim and annual financial statements and MD&A,

the number and average price of the securities distributed under the ATM and the aggregate gross and net proceeds raised and aggregate commissions paid or payable during the relevant period.

The previous obligation imposed on certain issuers to also file a report on SEDAR containing the same information within seven (7) days after each month in which a distribution occurred has been eliminated.  

Other Changes

The following changes should also be noted:

Short Form Eligible Exchange Requirements – The CSA had initially proposed the concept of an "ATM exchange", which created the potential for a broadened suite of potential ATM candidates by allowing exchanges outside of Canada to be the venue for the distribution activity without the need for a Canadian listing.  Such approach has been abandoned in the Amendments, which now require that the securities being distributed be listed on a short form eligible exchange (i.e. the Toronto Stock Exchange, the TSX Venture Exchange, the NEO or the CSE).

No Secondary Offerings – The Amendments provide only for the distribution of equity securities by issuers. 

No Debt Securities – While the CSA had requested comment on the potential to open the program for debt securities as well, the Amendments restrict eligibility to equity securities only.   

Non-Redeemable Investment Funds (NRIFs) and ETFs – The Amendments permit ATMs by NRIFs and ETFs that are not in continuous distribution. The current ETF Facts delivery requirement will still be in place for ETFs in continuous distribution. No other conditions have been added aside from the current operational requirements under National Instrument 81-102 Investment Funds.

Anticipated Impact of the Amendments

Even prior to the economic impact of the ongoing COVID-19 pandemic, traditional capital raising channels had been stressed and issuers were hungry for efficient access to capital.  ATMs had, for suitable candidates, filled a niche, albeit with both administrative complications and inefficiencies, as well as size and volume limitations that impeded broad adoption.

With the adoption of the Amendments, however, the CSA has more closely aligned the ATM regime with that found in the U.S., eliminated those administrative complications and taken off the shackles of size and volume constraints. 

As a result, we expect ATMs to become even more attractive and more effective as a supplementary capital raising mechanism.