CSA Amendments to At-The-Market Distribution Regime

Friday, June 12, 2020

On June 4, 2020, the Canadian Securities Administrators (the “CSA”) published the final amendments to National Instrument 44-102 – Shelf Distributions (“NI 44-102”) and changes to Companion Policy 44-102CP – Shelf Distributions (“44-102CP”) which, among other things, eliminate the requirement to obtain exemptive relief from certain regulatory requirements necessary for issuers to conduct an at-the-market offering (“ATM Offering”) in Canada (collectively, the “Amendments”).

Background on ATM Offerings

ATM Offerings are a form of prospectus distribution whereby an issuer, through a designated investment dealer, sells its equity securities at prevailing market prices directly through the stock exchange on which such securities are listed for trading. The sales process is analogous to that of a brokerage transaction, where an investor would call his or her broker with instructions to sell shares through a stock exchange.

In order to conduct an ATM Offering, the securities to be issued must be qualified under a base shelf prospectus and prospectus supplement in accordance with NI 44-102. Once the prospectus supplement is filed, the issuer can sell its equity securities under such ATM Offering for a period of up to 25 months, subject to the expiry of the issuer’s base shelf prospectus. The current regime imposes a limitation on the amount of capital that can be raised under the ATM Offering by limiting the market value of securities issuable under a single ATM Offering prospectus supplement to 10% of the aggregate market value of the offered class of securities as at the last trading day of the month before the month in which the first trade under the ATM Offering is made (the “10% Aggregate Cap”).

Under the current regime, the issuer and the investment dealer(s) are required to obtain discretionary exemptive relief from the securities regulators from the following regulatory requirements:

(i) the requirement to physically deliver a prospectus to purchasers in the ATM Offering;

(ii) the requirement to state that the right of purchasers to withdraw from the purchase during the two business days after the delivery of the prospectus does not apply to an ATM Offering; and

(iii) the requirement to state that the right of action against a dealer for non-delivery of the ATM Offering prospectus does not apply (collectively, the “Exemptive Relief”).

The Exemptive Relief is routinely granted by the applicable securities regulators. However, obtaining such relief adds additional costs and time to complete the ATM Offering and the exemptive relief orders typically impose certain conditions, including (i) a cap on the number of securities that can be sold under an ATM Offering of 25% of the total trading volume of the issuer’s securities on any given day (the “25% Daily Cap”) and (ii) a requirement that the issuer publicly report the number and average price of the securities distributed on a monthly basis, and the total gross proceeds, commissions and net proceeds within seven days after the end of the month (the “Monthly Report”). 

Summary of the Amendments

As a result of the Amendments, the CSA will make the following changes to the ATM Offering regime effective August 31, 2020.

Codifying the Exemptive Relief

Issuers will no longer be required to apply for the Exemptive Relief in connection with an ATM Offering. As the Exemptive Relief has historically been granted as a matter of course, the Exemptive Relief will be codified directly into NI 44-102.  

No Liquidity Requirements

Upon the Amendments becoming effective, ATM Offerings will not be subject to the 25% Daily Cap. The rationale for this approach is the CSA’s (reasonable) expectation that issuers would not conduct ATM Offerings in a manner so as to have a material impact on the market price of its securities. Additionally, issuers are required to engage an investment dealer to facilitate an ATM Offering into the marketplace, and such dealers are expected to have the expertise in managing orders to limit negative impacts on market integrity and, moreover, are prohibited from engaging in conduct that may disrupt a fair and orderly market.

10% Aggregate Cap

As a result of the Amendments, the overall size of issuer’s ATM Offerings will no longer be subject to the 10% Aggregate Cap.

Cover Page Disclosure

The Amendments impose a new disclosure requirement on issuers seeking to establish an ATM Offering program, whereby issuers will be required to disclose on the cover page of their base shelf prospectus that the prospectus may qualify as an ATM Offering, rather than establishing the offering through a base shelf prospectus supplement.

Designated News Releases

The Amendments introduce the concept of a “designated news release” as a means of incorporating material facts into an ATM Offering prospectus rather than requiring the filing of a prospectus supplement or an amended prospectus. If an issuer disseminates a news release disclosing information that, in the issuer’s determination, constitutes a “material fact”, the issuer will be required to identify on the face page of the news release that it is a “designated news release” for the purposes of the ATM Offering prospectus. An ATM Offering prospectus would also include a statement that any such “designated news releases” will be deemed to be incorporated by reference into the ATM Offering prospectus.

Reporting Requirement

The Amendments streamline the reporting requirements under ATM Offerings by permitting issuers to report the distributions made under the ATM Offering on a quarterly basis rather than filing the Monthly Report. The quarterly report must include, among other things, disclosure related to the number and average price of the securities distributed, gross proceeds and aggregate commissions paid during the period. Issuers are not required to file a separate report on distributions if such disclosure is included in each of the issuer’s interim financial reports, annual financial statements and management discussion and analysis.  

Funds & ETFs

The Amendments will permit non-redeemable investment funds and exchange-traded mutual funds that are not in continuous distribution to conduct ATM Offerings for equity securities. In addition, mutual funds that are traded on an exchange that are in continuous distribution and meet the definition of an “ETF” under National Instrument 41-101 – General Prospectus Requirements are also permitted to conduct ATM Offerings for equity securities under the Amendments. Funds and ETFs conducting an ATM Offering must include a statement in the prospectus that any ATM Offering will be conducted in accordance with National Instrument 81-102 – Investment Funds.

Additional Considerations

The Amendments highlight the requirement that issuers must file a prospectus in each jurisdiction in which a distribution will occur. Given that distributions are made directly on a stock exchange or marketplace, it is difficult, or nearly impossible, for the issuer to determine where the distribution will occur as the issuer or investment dealer will not be able to determine where a purchaser is located at the time of the distribution. The Amendments appear to indicate that an issuer pursuing an ATM Offering will be required to qualify its base shelf prospectus in all provinces and territories in Canada and thus pay any applicable fees in all such jurisdictions. 

The Amendments do not provide exemptive relief from the French language translation requirements for the ATM Offering documents, despite certain stakeholders advocating for such translation relief to be included in the new regime for reasons such as reduction in cost and time. The CSA noted that the Autorité des marchés financiers will analyze the merits of any exemptive relief application from the translation requirements and, if appropriate, grant relief from the obligation to translate ATM Offering documents subject to appropriate conditions.

The CSA have based the Amendments on their expectations as to the conduct of market participants and have indicated that they intend to be alert to any potential abuse by monitoring ATM Offerings going forward.

Additionally, the Amendments align the Canadian ATM Offering regime more closely to the existing ATM Offering regime in the United Shares, offering more flexibility to cross-listed issuers seeking to access equity markets in the United States and Canada through a cross-border ATM Offering program.

Ultimately, the Amendments offer a welcome change for eligible issuers seeking an ongoing and efficient method of raising capital.

If you have any questions with respect to this legal update, please contact Charlie Malone ([email protected]), Michael Rennie ([email protected]), Joel Fraser ([email protected]) or any other member of our Corporate Finance & Securities practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.