Notice: NI - 45-101 - Rights Offerings

NOTICE OF PROPOSED NATIONAL INSTRUMENT 45-101
RIGHTS OFFERINGS
COMPANION POLICY 45-101CP
AND FORM 45-101F
AND RESCISSION OF POLICIES

Substance and Purpose of Proposed National Instrument and Companion Policy

The substance and purpose of the proposed National Instrument are to prescribe the basis on which an issuer may, by way of arights offering, sell additional securities of its own issue to holders of its securities either by way of a prospectus or in reliance on therights offering prospectus exemptions in Canadian securities legislation. Under Canadian securities legislation the issuer must send tothe Canadian securities regulatory authority or regulator information about the securities offered under the rights offering that isacceptable and a Canadian securities regulatory authority or regulator may object to the use of the rights offering prospectusexemption and rights offering registration exemption. The proposed National Instrument requires that issuers seeking to use therights offering prospectus exemption provide the Canadian securities regulatory authority or regulator in a jurisdiction in which therights offering is effected with information about the issuer, including information previously delivered to the issuer's securityholders,to permit the Canadian securities regulatory authority or regulator to confirm that securityholders have been provided with currentinformation about the affairs of the issuer and are not in need of a prospectus for the rights offering. The information will allow theCanadian securities regulatory authorities or regulators to assess if the rights offering is being made in compliance with the proposedNational Instrument and that the terms are clearly stipulated, and to ensure that the offering has not been structured for the purposeof allowing a related party to increase its proportionate ownership interest in the issuer's securities. The proposed NationalInstrument also requires issuers to provide information to securityholders in the form prescribed. The proposed Form prescribes theinformation to be sent to securityholders.

The proposed National Instrument provides that the rights offering prospectus exemption is unavailable in certain circumstances.These circumstances include:

(a) as a result of the exercise of the rights under the offering and the exercise of rights issued within the previous 12 months therewould be an increase of more than 25 percent in the number, or, in the case of debt, the principal amount, of the outstandingsecurities of the class to be issued upon the exercise of the rights;

(b) the rights are exercisable for securities of a class which were not previously outstanding;

(c) there is an agreement to compensate dealers in a manner which encourages solicitation of the exercise of rights by holders ofrights that were not securityholders of the issuer immediately prior to the rights offering;

(d) there is a minimum amount of proceeds necessary to conduct the purpose for which the funds are being raised and the offeringis open for more than 30 days;

(e) the issuer is not a reporting issuer in the local jurisdiction and the offering is open for more than 45 days;

(f) the issuer is a reporting issuer in the local jurisdiction and the offering is open for more than 90 days; and

(g) the issuer is not a reporting issuer in the local jurisdiction but is a reporting issuer in another jurisdiction and the issuer has notfiled in the local jurisdiction the continuous disclosure documents that were required to be filed in the jurisdiction in which it was areporting issuer and the offering is open for more than 90 days.

The purpose of the proposed Companion Policy is to provide information as to factors that the Canadian securities regulatoryauthorities or regulators will consider in determining whether to object to the offering proceeding under the rights offeringprospectus exemption or in refusing to issue a receipt for a prospectus used for a rights offering. The proposed Companion Policyalso provides guidelines as to how certain thresholds are to be calculated as well as the types of evidence suggested to establish fairvalue of the securities to be issued on exercise of rights and as to the financial ability of a person or company supplying a stand-bycommitment to meet its obligations under the commitment.

The proposed Companion Policy also provides notice as to the position of the Canadian securities regulatory authorities on the useof the rights offering registration exemption independent from the use of the rights offering prospectus exemption. The proposedCompanion Policy also provides notice that the issuer may need a mechanism to "claw back" securities subscribed for by relatedparties.

The proposed Companion Policy advises issuers that excluding securityholders resident in a particular jurisdiction, if there issufficient connection to the jurisdiction, may cause the Canadian securities regulatory authority in the jurisdiction to consider takingaction against the issuer and its directors and officers.

Finally, the proposed Companion Policy advises issuers that the approval of the securities regulatory authority or regulator to thelisting representations required in the proposed Form will be evidenced by the acceptance of the rights offering circular and theapproval of the securities regulatory authority or regulator to listing representations in a prospectus will be evidenced by theprospectus receipt.

The proposed National Instrument and Companion Policy are initiatives of the Canadian Securities Administrators (the "CSA").The proposed National Instrument is expected to be adopted as a rule in British Columbia, Alberta, Ontario and Nova Scotia, as aCommission regulation in Saskatchewan and as a policy in all other jurisdictions represented by the CSA. The proposedCompanion Policy is expected to be implemented as a policy in all of the jurisdictions represented by the CSA. The proposedNational Instrument and Companion Policy are substantially similar to administrative practices and policies of the Canadiansecurities regulatory authorities including Uniform Act Policy Statement No. 2-05, British Columbia Securities Commission PolicyStatement No. 3-05, Alberta Securities Commission Policy Statement No. 5.2 and Ontario Securities Commission PolicyStatement No. 6.2, which they replace.

The proposed National Instrument and Companion Policy implement, in part, the recommendation of the CSA Task Force onOperational Efficiencies that Canadian securities regulatory authorities increase the co-ordination of regulation, includingstandardization of requirements.

Terms used in the proposed Companion Policy that are defined or interpreted in the National Instrument or a definition instrument inforce in the jurisdiction should be read in accordance with the National Instrument or definition instrument, unless the contextotherwise requires.

Summary of the Proposed National Instrument, Companion Policy and Form

Under Canadian securities legislation the issuer must send to the Canadian securities regulatory authority or regulator informationabout the securities offered under the rights offering that is acceptable and a Canadian securities regulatory authority or regulatormay object to the use of the rights offering prospectus exemption and rights offering registration exemption.

For rights offerings made in reliance on a rights offering prospectus exemption, the most significant change to the regulatory regimeis the requirement to prepare, certify and deliver to the Canadian securities regulatory authorities or regulators an offering circular inaccordance with a prescribed form. This form must be delivered to the Canadian securities regulatory authorities or regulators in thejurisdictions in which the rights offering is effected together with various documents that will allow the Canadian securities regulatoryauthorities or regulators to determine that the use of the rights offering prospectus exemption is appropriate in the circumstances.

For rights offerings made under a prospectus, the most significant change to the regulatory regime is the codification of therequirement that the prospectus qualify the distribution of securities issuable upon the exercise of rights as well as the rights issuedunder the prospectus.

The proposed National Instrument also harmonizes the practice of some of the Canadian securities regulatory authorities onstand-by commitments, pricing of rights offerings, the additional subscription privilege and the appointment of a depository for arights offering.

The proposed National Instrument prohibits an issuer from filing a prospectus or an amendment to a prospectus or relying on therights offering prospectus exemption for a rights offering if the issuer or the rights offering do not comply with the requirements ofthe National Instrument.

The proposed National Instrument provides that the rights offering prospectus exemption is unavailable in certain circumstances.These circumstances include:

(a) as a result of the exercise of the rights under the offering and the exercise of rights issued within the previous 12 months therewould be an increase of more than 25 percent in the number, or, in the case of debt, the principal amount, of the outstandingsecurities of the class to be issued upon the exercise of the rights;

(b) the rights are exercisable for securities of a class which were not previously outstanding;

(c) there is an agreement to compensate dealers in a manner which encourages solicitation of the exercise of rights by holders ofrights that were not securityholders of the issuer immediately prior to the rights offering;

(d) there is a minimum amount of proceeds necessary to conduct the purpose for which the funds are being raised and the offeringis open for more than 30 days;

(e) the issuer is not a reporting issuer in the local jurisdiction and the offering is open for more than 45 days;

(f) the issuer is a reporting issuer in the local jurisdiction and the offering is open for more than 90 days; and

(g) the issuer is not a reporting issuer in the local jurisdiction but is a reporting issuer in another jurisdiction and the issuer has notfiled in the local jurisdiction the continuous disclosure documents that were required to be filed in the jurisdiction in which it was areporting issuer and the offering is open for more than 90 days.

The proposed National Instrument provides an exemption to compliance with it if there is minimal connection of the issuer to thejurisdiction or to Canada based on number of securityholders and percentage of capital held by securityholders.

The proposed Companion Policy sets out some factors that the Canadian securities regulatory authorities and regulators willconsider in determining whether to object to the offering proceeding under the rights offering prospectus exemption. The proposedCompanion Policy also provides guidelines as to how certain thresholds are to be calculated as well as the types of evidencesuggested to establish fair value of the securities to be issued on exercise of rights and as to the financial ability of a person orcompany supplying a stand-by commitment to meet its obligations under the commitment.

The proposed Companion Policy advises that the regulators may, in certain circumstances, refuse to issue a receipt for a prospectusunder which rights are issued if the rights are exercisable into convertible securities and the securities underlying the convertiblesecurities are not qualified by the prospectus.

The proposed Companion Policy also provides notice as to the position of the Canadian securities regulatory authorities on the useof the rights offering registration exemption independent from the use of the rights offering prospectus exemption.

The proposed Companion Policy provides notice that the issuer may need a mechanism to "claw back" securities subscribed for byrelated parties.

The proposed Companion Policy advises issuers that excluding securityholders resident in a particular jurisdiction, if there issufficient connection to the jurisdiction, may cause the Canadian securities regulatory authority in the jurisdiction to consider takingaction against the issuer and its directors and officers.

Finally, the proposed Companion Policy advises issuers that the approval of the securities regulatory authority or regulator to thelisting representations required in the proposed Form will be evidenced by the acceptance of the rights offering circular and theapproval of the securities regulatory authority or regulator to listing representations in a prospectus will be evidenced by theprospectus receipt.

The proposed Form requires disclosure of the name of the issuer, a summary of the offering, a brief description of the business ofthe issuer, details of the rights and securities being offered, details of the registration and delivery of security certificates under theoffering, identification of the subscription agent and the transfer agent, a description of how to exercise the rights, a description ofany stand-by commitments and escrowing of proceeds and depository arrangements, identification of the managing dealer andsoliciting dealers, information relating to ownership or changes of ownership of the securities of the issuer as well as the use ofproceeds, statements relating to transferability of rights, a description of any material changes in the business of the issuer and othermaterial facts. Finally, the proposed Form requires that statutory rights be set out and that the Form be certified.

Related Instruments

The proposed National Instrument, Form and Companion Policy are related. The proposed Companion Policy is related, inOntario, to subparagraph 35(1)14(i) and subclause 72(1)(h)(i) of the Securities Act (Ontario)(the "Ontario Act").

Authority for Proposed National Instrument and Form

In those jurisdictions in which the National Instrument and Form are to be adopted or made as a rule or regulation, the securitieslegislation in each of those jurisdictions provides the securities regulatory authority with rule-making or regulation-making authorityin respect of the subject matter of the proposed National Instrument and Form.

The following sections of the Ontario Act provide the Ontario Securities Commission (the "Ontario Commission") with authority tomake the National Instrument and Form. Paragraph 143(1)13 of the Ontario Act provides the Ontario Commission with theauthority to make rules providing for the regulating of trading or advising on securities to prevent trading or advising that isfraudulent, manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)20 of the Ontario Act provides the OntarioCommission with the authority to make rules providing for the removal of exemptions under the Ontario Act. Paragraph 143(1)39of the Ontario Act provides the Ontario Commission with the authority to make rules requiring or respecting the media, format,preparation, form, content, execution, certification, dissemination and other use, filing and review of all documents required under orgoverned by the Ontario Act, the regulation and all documents determined by the regulations to be ancillary to the documents. Inaddition, the Ontario Act provides the Ontario Commission with the authority to object to the use of the rights offering prospectusexemption. The Director under the Ontario Act has been assigned the power to object to the use of the rights offering prospectusexemption under section 6 of the Ontario Act.

Alternatives Considered

For those offerings that are made in reliance on the rights offering prospectus exemption, the CSA considered enacting no rule at allbut rather leaving Uniform Act Policy Statement No. 2-05 and the various local policies and administrative practices of theCanadian securities regulatory authorities in place and relying on the power of Canadian securities regulatory authorities to object tothe use of the rights offering prospectus exemption contained in Canadian securities legislation. The Ontario Commission consideredreformulating its Ontario Securities Commission Policy Statement No. 6.2 into a local rule. The CSA was of the view that theapproach adopted will provide more useful guidance to issuers by further defining the matters of concern to the CSA and to theextent practicable providing harmonization of approach by the Canadian securities regulatory authorities.

No other alternatives were considered by the CSA to the adoption of the proposed National Instrument and Form.

Unpublished Material

In proposing the National Instrument, Form and Companion Policy, the CSA have not relied on any significant unpublished study,report, decision or other written materials.

Anticipated Costs and Benefits

The principal benefit of the proposed Instrument and Form will be to harmonize the approach of Canadian securities regulatoryauthorities and provide more certainty of regulatory issues about the various aspects of rights offerings.

The costs associated with the proposed Instrument and Form are the costs associated with having a prospectus for a rights offeringalso qualify the securities underlying the rights and maintaining its currency while rights are outstanding. Issuers may also incurincreased costs in the preparation of the offering circular in the Form.

In the view of the CSA the benefits outweigh the costs.

Regulations to be Revoked

The adoption of the proposed rule does not require any regulation to be revoked.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument and Companion Policy.Submissions received by February 19, 1998 will be considered.

In particular, comment is encouraged on the definition of "related party" including the level of inquiry necessary to determine if aparty is related, on the removal of the rights offering prospectus exemption in Section 2.2 of the National Instrument and for thematters described in paragraphs 1.2(1)(a), 1.2(1)(b) and 1.3(1) of the Companion Policy. Specifically, the CSA would appreciatethe benefit of any views concerning the appropriateness of the limits established in Section 2.2 of the National Instrument. Further,the CSA has not determined whether it is necessary to provide guidance on, or define, when an issuer is being "reactivated" andwhether the language in paragraph 1.2(1)(b) of the Companion Policy is appropriate as a replacement for the term "major newundertaking". Pricing of rights offerings has in the past created issues for both regulators and issuers. Part 5 of the Instrument andPart 3 of the Companion Policy are intended to clarify the regulatory position on pricing. Comment is specifically requested onthese Parts. Comment is also specifically requested on paragraph 1.3(1)(b) of the Companion Policy. Finally, the CSA wouldappreciate specific comment on subsection 6.1(2) of the Companion Policy.

Comment is also requested on the appropriateness of the Form requirements relating to a description of the business of the issuerand certification by the issuer and its directors.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario SecuritiesCommission, in duplicate, as indicated below.

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Jacques Labelle, General Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. Assecurities legislation in certain provinces requires that a summary of written comments received during the comment period bepublished, confidentiality of submission cannot be maintained.

Questions may be referred to any of:

 

Lata Casciano
Senior Policy Advisor
British Columbia Securities Commission
(604) 899-6500

David Sheridan
Legal Counsel
Alberta Securities Commission
(403) 427-5201

Barbara Shourounis
Director
Saskatchewan Securities Commission
(306) 787-5645

Margo Paul
Legal Counsel
Ontario Securities Commission
(416) 593-8136

Daniel Laurion
Chief of Regulations
Commission des Valeurs Mobilières du Québec
(514) 873-5326

Text of Proposed National Instrument, Companion Policy and Form

 

The text of the proposed National Instrument, Companion Policy and Form follow, together with footnotes that are not part of theNational Instrument, Companion Policy or Form, as applicable, but have been included to provide background and explanation.

 

Rescission of Policies

The proposed National Instrument, Companion Policy and Form will replace, in Ontario, Uniform Act Policy Statement No. 2-05and Ontario Securities Commission Policy Statement No. 6.2. The Ontario Commission proposes to rescind those policies. Thetext of the proposed rescission is as follows:

"The policies of the Ontario Securities Commission entitled Uniform Act Policy Statement No. 2-05 and Ontario SecuritiesCommission Policy Statement No. 6.2 are rescinded."

Dated: November 21, 1997.