Canada: CSA Provides Guidance On The Listed Issuer Financing Exemption

In November 2022, a new prospectus exemption, the listed issuer financing exemption (the "exemption"), became effective. The purpose of this exemption is to provide, for certain issuers, the option to raise small amounts of capital relying on their continuous disclosure filings. See an overview of this exemption prepared by our team here. On June 1, 2023, the Canadian Securities Administrators (the "CSA") published guidance on the exemption¹ which we have summarized below.

As a reminder, the goal of the exemption is to provide a more efficient way for issuers to raise smaller amounts of capital and have better access to retail investors, while also reducing regulatory burden and associated costs.

The securities issuable under the exemption are limited to listed equity securities and units comprised of listed equity securities and warrants exercisable into listed equity securities². Provided that all conditions are satisfied, the CSA has clarified that issuers may also distribute flow-through shares and charitable flow-through shares under the exemption. The securities issued will be freely tradable (i.e. not subject to resale restriction under National Instrument 45-102 – Resale of Securities). An issuer may combine in an offering this exemption with other prospectus exemptions keeping in mind that the resale restrictions will be different.

The maximum amount of proceeds that may be raised by an issuer relying on the exemption, in any one year period, is the greater of $5 million or 10% of its market capitalization, up to a maximum amount of $10 million. The CSA has clarified that any potential proceeds to be received upon the exercise of warrants issued under the financing do not need to be included in this calculation. In addition, a distribution using the exemption, combined with all other distributions made under the exemption in any one year period, may not result in an increase of more than 50% in the issuer's outstanding listed securities. Note that any equity securities issuable upon the exercise of warrants must be taken into account in this calculation.

An issuer who wishes to use the exemption must reasonably expect that it will have sufficient available funds to meet its business objectives and continue its operations for a period of 12 months following the distribution. In order to satisfy this requirement, issuers may need to set a minimum offering amount. Such minimum offering amount may not be less than the issuer's estimate of the funds required to continue its operations and achieve its business objectives for the next 12 months, considering offering costs, the issuer's working capital or deficiency, projected operating cash flow³ and any committed sources of additional funding. An issuer should disclose in the offering document each significant event that must occur for its business objectives to be met and the costs related thereto. In addition, the issuer must provide a breakdown of its available funds after the distribution and how it intends to use such funds in the offering document.

As a reminder, no solicitations may occur before the issuer has issued and filed a news release announcing the offering and filed an offering document. Therefore, the CSA has confirmed that issuers may not rely on the exemption to issue securities for debt as such requirement would not be satisfied. We caution issuers that using the exemption in the context of a bought deal offering will require close attention to ensure that this requirement as well as others are satisfied.

To use the exemption in Quebec, only the offering document and the news release announcing the offering need to be filed in French or French and English (not the continuous disclosure documents that the issuer has filed on SEDAR)⁴. While an issuer could technically use the exemption concurrently with a prospectus offering, it may not do so to avoid the requirement to translate to French the prospectus and continuous disclosure documents (i.e. use the exemption in Quebec concurrently with a prospectus in other provinces).

An issuer may close an offering under the exemption in multiple tranches provided that the proceeds for the first tranche represent at least the minimum offering amount and that the last tranche closes no later than the 45^th day after issuing and filing the news release announcing the offering. Within 10 days of any distribution under the exemption, the issuer must file a report of exempt distribution.

Footnotes

1. See CSA Staff Notice 45-330 – Frequently Asked Questions about the Listed Issuer Financing Exemption.

2. Note: The CSA is of the view that broker warrants would not typically be considered a "listed equity security" and therefore the exemption would not be available for their distribution.

3. Note: The CSA expects that the projected operating cash flow will be similar to cash flow from operations in the issuer's most recent financial period, unless there are changes in key assumptions.

4. Unless the issuer is a reporting issuer in Quebec in which case it must comply with the linguistic obligations of the Province of Quebec.

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