Small and mid-sized issuers struggling to raise capital got some good news recently. The Ontario Securities Commission implemented an exemption that allows companies to issue shares to existing stockholders without a new prospectus.
The cost of one of these prospectuses is enough to scare off many companies that are uncertain of the market’s reception. Now a reporting public issuer in Ontario can skip that route and appeal straight to its existing shareholder base.
“I think this is really targeted to junior companies that are on really tight budgets, where cash is tight and they can’t afford the cost of preparing all the disclosure required for a prospectus,” says Jon Levin, a partner at Fasken Martineau DuMoulin LLP. “I think you’re going to see a lot of natural resource companies looking at this as a potential opportunity to raise funding.”
The new exemption is not a blank cheque, though. Shareholders can only buy up to $15,000 of listed securities in aggregate for any 12-month period, unless they obtain suitability advice from a registered investment dealer. The shares are subject to a four-month hold period. Also, while the shares are newly issued (primary market), they come with statutory secondary-market liability — meaning buyers will be able to use them in potential class actions.
The exemption also bars issuers from making an offering that would increase the number of outstanding listed securities by more than 100 per cent.
Jonah Mann, a partner at Stikeman Elliott LLP, says the new measure should put small and mid-sized companies in a better position to avoid a cash crunch. “Companies – and this tends to be for small companies – tend to know their investors really well and they’re able to reach them faster. If you have to do a broader outreach, it actually increases the costs that this measure is intended to mitigate.”
The expenses involved with doing a prospectus offering go beyond legal and underwriters’ fees, he says. “You also have filing fees with the securities commissions. There are printing and mailing fees associating with delivering it and for the auditors and all sorts of professionals who come together in the working group to facilitate the offering. So if you’re accessing your shareholder base directly, there’s a huge cost saving right there.”
The measure brings Ontario’s rules into harmony with exemptions adopted by regulators in most other provinces and in the US. It also balances the need for fundraising with investor protection, says Neill May, a partner at Goodmans LLP, adding it is just good common sense.
“Why would you would need the machinery of the Securities Act and the prospectus process to provide disclosure to your existing security holders, who presumably and hopefully are already familiar with your company’s business affairs, prospects, risks and uncertainties?
“If you were to stop a person on the street and ask, ‘Does it make sense that, when somebody’s already invested in your company, you should have to provide them with a prospectus to issue securities of the type that they already hold?’ they would probably say, ‘No that’s ridiculous.’ Why this exemption wasn’t introduced some time ago is not clear to me. I’d certainly characterize it as a common-sense development.”