Proposed Amendments to At-the-Market Offering Rules

The Canadian Securities Administrators (CSA) recently published a notice and request for comment that would provide a new regime for issuers conducting at-the-market equity distributions (ATM Offerings) in Canada (the Proposed Amendments).

Under an ATM Offering, an issuer may distribute securities from time to time through the facilities of a stock exchange pursuant to a base shelf prospectus and a shelf prospectus supplement. Underwriting fees are generally lower in an ATM Offering than if such shares were sold in a bought deal or traditional brokered offering. Shares are distributed at market prices prevailing at the time of the sale rather than at a discount to market.

Despite the typically lower costs to issuers compared to a bought deal or traditional brokered offering, ATM Offerings have not been as popular in Canada as they have become in the United States. This is largely because rules governing ATM Offerings in Canada have historically not been particularly user-friendly. For example, currently ATM Offerings can only be conducted in Canada after obtaining formal exemptions from the prospectus delivery and technical prospectus disclosure requirements (Exemption Orders) which can be time-consuming and costly.

Exemption Orders: Need Not Apply

The Proposed Amendments generally seek to reduce the regulatory burden associated with ATM Offerings by removing the need to apply for Exemption Orders. Most importantly:

  • The Proposed Amendments will exempt an underwriter in an ATM Offering from the prospectus delivery requirement set out in securities legislation.

  • Exemptions from certain prospectus form requirements are also codified under the Proposed Amendments, including those related to the statement of investor rights typically required in a Canadian prospectus.

Removal of 10% Cap

The current ATM Offering rules provide that the market value of equity securities distributed in an ATM Offering may not exceed 10% of the aggregate market value of the issuer’s outstanding equity securities of the same class (the 10% Cap). The Proposed Amendments would eliminate the 10% Cap. Historically, the 10% Cap has limited the usefulness of ATM Offerings to small and mid-size issuers. The CSA notes that despite the removal of the 10% Cap, concerns regarding dilution are adequately addressed through existing continuous disclosure requirements and the requirement to engage an underwriter in an ATM Offering. The CSA is specifically seeking comment in the Proposed Amendments on the threshold question whether a market value cap should continue to be included in the new ATM Offering rules.

Liquidity Requirements Being Considered

The CSA has also specifically sought comment on whether a daily volume limitation or liquidity test should be imposed. When granting Exemption Orders, Canadian securities regulators have typically required that (i) the aggregate number of securities of the class distributed under the ATM Offering prospectus in Canada on any trading day not exceed 25% of the trading volume of that class on all Canadian marketplaces on that day, and (ii) the securities be “highly liquid securities.” To qualify as a highly liquid security, a security must have traded, as reported on a consolidated market display during a 60-day period ending not earlier than 10 days prior to the distribution, (a) an average of at least 100 times per trading day and (b) with an average trading value of at least $1 million per trading day, or constitute an “actively traded security” under relevant United States securities laws at the time of distribution.

The CSA acknowledges that these conditions limit the benefit of ATM Offerings for issuers with low trading volumes, adversely affecting accessibility for small to mid-size issuers. The CSA has suggested that daily volume limitations and liquidity tests are arguably unnecessary, since both issuers and underwriters have incentives to preserve an orderly market. Further, the underwriter of the ATM Offering would be expected to have the experience and expertise in managing orders to limit any negative impact on market integrity and is also prohibited from engaging in conduct that may disrupt a fair and orderly market.

Other Items Proposed

The Proposed Amendments also contemplate the following:

  • The current ATM Offering rules permit issuers to use ATM Offerings to issue instalment receipts that are convertible into equity securities. The Proposed Amendments eliminate this option because the CSA has indicated there does not appear to be market demand in Canada.

  • The CSA is seeking comment on whether the issuance of debt securities should be permitted under ATM Offerings. The Proposed Amendments currently permit distributions of equity securities only.

  • The Proposed Amendments will permit ATM Offerings by non-redeemable investment funds and exchange-traded mutual funds that are not in continuous distribution. The CSA is seeking comment on, among other things, whether permitting these types of issuers to conduct ATM Offerings is warranted and, if so, whether any additional conditions should apply.

Comments should be submitted in writing to a CSA member on or before August 7, 2019. Click here to read the CSA notice and find contact information.

DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.