On June 1, 2023, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 45-330: Frequently Asked Questions about the Listed Issuer Financing Exemption (the Staff Notice). The Staff Notice provides clarity on certain questions from issuers and market participants with respect to the recently introduced listed issuer financing exemption under National Instrument 45-106 – Prospectus Exemptions (the Exemption). The Staff Notice addressed, amongst other things, the ambiguity surrounding qualification requirements for the Exemption, as well as the types of securities and permissible offering methods.

As explained in a previous Dentons Insight, the Exemption permits established reporting issuers with equity securities listed on a Canadian stock exchange to issue free trading securities without filing a prospectus. Subject to certain limitations, the Exemption allows issuers to raise up to the greater of CA$5 million and 10% of its market capitalization (up to a maximum of CA$10 million) in a 12-month period.

Qualifications requirements

The Staff Notice clarifies that an issuer must be listed on a recognized Canadian stock exchange at the time of the distribution in order to qualify for Exemption - it is not sufficient to be listed either concurrently with or following the proposed offering.

An issuer cannot be in default of any Canadian securities legislation requirements when relying on the Exemption. In particular, an issuer cannot qualify for the Exemption if they:

• Are on a list of defaulting issuers in Canada;
• Have been advised by staff at the securities regulators that the issuer must refile a non-compliant disclosure document as part of a prospectus or continuous disclosure review; or
• Have otherwise defaulted on their requirements under applicable Canadian securities laws.

The CSA also confirmed that subscription agreements are not required in connection with an offering completed under the Exemption.

Available funds requirement

To rely on the Exemption, an issuer must reasonably expect to possess the funds necessary to operate its business for the 12 months following the completion of the offering. Consequently, issuers are required to have a minimum offering amount that is sufficient for it to continue its operations and achieve its objectives for 12 months. In order to determine the funding requirements, an issuer must consider the costs of each business milestone, projected operating cash flow, offering costs, its working capital or deficiency and any committed sources of additional funding.

The Staff Notice confirms an issuer can close an offering using the Exemption in multiple tranches, however, the amount raised by the issuer upon closing of the first tranche must be sufficient to meet its business objectives and liquidity requirements for 12 months. In addition, an issuer must complete the final tranche of the offering no later than 45 days after announcing the offering.

Types of securities

The issuance of flow-through shares is permissible under the Exemption (including the newly expanded “super flow-through” critical mineral exploration tax credits). Charitable flow-through shares are also permissible, provided all of the conditions of the Exemption are satisfied and the end purchaser is named in the report of the exempt distribution filed subsequent to closing of the offering.

The Staff Notice confirmed that the Exemption does not apply to the distribution of broker's warrants as they are not a listed equity security. Underwriters may continue to receive broker’s warrants but will need to do so under a separate exemption that may be subject to applicable hold periods.

The CSA is of the view that the Exemption does not apply to the distribution of securities to satisfy outstanding debt since one of the conditions of the Exemption is that the issuer cannot solicit an offer to purchase before issuing and filing a news release announcing the offering and the issuer will not be able to satisfy this condition if it already has bona fide debt outstanding with the intended “purchaser.”

Types of offerings

The Staff Notice clarifies that, while the Exemption may be utilized for bought deal offerings, it raises potential concerns for securities regulators with respect to:

• Who is the purchaser and whether the purchaser receives all of the rights available under the Exemption;
• What happens when the underwriter has to purchase leftover securities; and
• Underwriters soliciting purchasers before the filing of a news release and prescribed offering document required under the Exemption.

In order to comply with the requirements of the Exemption, the CSA expects that the bought deal offering must be completed in such a way that the actual purchaser maintains all the rights contemplated under the Exemption and will be named in the exempt distribution report filed subsequent to closing of the offering. If the underwriter is required to purchase any leftover securities under the bought deal offering, then the CSA expects that such securities would be acquired by the underwriter under a separate prospectus exemption. Furthermore, the bought deal offering must be marketed in such a way that the offering complies with the requirements of the Exemption which prohibits any solicitation prior to the issuance of the news release and prescribed offering document.

Concurrent offerings

The Staff Notice confirms that an issuer may use the Exemption concurrently with other prospectus exemptions, such as the accredited investor exemption. However, the Exemption cannot be used in Quebec concurrently with a prospectus offering in another province due to the potential of avoiding the translation requirements for the prospectus and continuous disclosure documents in Quebec. 

Calculating the maximum offering amount

Under the Exemption, the offering, combined with all other distributions made by the issuer under this same exemption during the 12 months immediately before the date of the issuance of the news release announcing the offering, cannot result in an increase of more than 50% in the issuer’s outstanding listed equity securities, as of the date that is 12 months before the date of the news release (not as of the date of the news release - this may limit the use of the Exemption for an issuer that recently completed a reverse takeover). The Staff Notice confirmed that any listed securities issuable on the exercise of warrants distributed in the offering are included when calculating this 50% limit. However, the exercise price of such warrants is not included in the maximum dollar amount calculation.

For more information about the Exemption or if you need assistance with preparing a distribution under the Exemption, please contact Eric Lung, Jason Saltzman, Ben Iscoe, Matthew Bennett or another member of our Corporate Finance group. 

The authors would like to thank Josh Pollock, summer articling student at Dentons’ Vancouver office, for his valuable research and contributions to this update.