CSA amendments to at-the-market offering rules provide flexibility to Canadian issuers
By Jessica Brown, Lindsay Cox and Mike Henry (Student-at-Law)
On June 4, 2020, the Canadian Securities Administrators (CSA) released amendments to National Instrument 44-102 Shelf Distributions (NI 44-102) and changes to the Companion Policy 44-102CP (44-102CP). The amendments will come into effect on August 31, 2020, and remove the requirements for issuers to obtain prospectus relief when conducting at-the-market (ATM) equity distributions. The amendments also remove liquidity and volume caps on daily and aggregate ATM distributions. Overall, these amendments are expected to reduce the cost and time of implementing an ATM offering program, and will likely make ATM offerings a more valuable tool in the hands of Canadian issuers.
ATM offerings are currently less popular in Canada than they are in the United States. Responses to the CSA's solicitation for feedback indicated that this may be due to the present requirements to obtain exemptive relief from certain prospectus offering requirements. As a result of this feedback, the CSA amended NI 44-102 and 44-102CP to bring the policies more in line with the current active policies of the United States Securities and Exchange Commission.
ATM offerings allow issuers to sell equity securities directly into a stock exchange or other trading market at prevailing market prices at the time of the sale. Generally, an issuer looking to take advantage of ATM offerings will put a distribution agreement in place with a registered dealer. The agreement allows the issuer to raise capital in the markets on short notice with an ATM offering. When the issuer wants to sell equity securities into the market, it will deliver a sell notice to its registered dealer. The sell notice specifies the minimum price at which the securities will be sold, the maximum number of securities that may be offered into the market, and specify a time window within which the offering may take place. The registered dealer may sell equity securities into any recognized Canadian "marketplace" (within the definition of that word in National Instrument 21-101 Marketplace Operation) such as the Toronto Stock Exchange or the TSX Venture Exchange, according to the terms of the sell notice.
There are several advantages of ATM equity distributions for Canadian issuers. The primary advantage is flexibility for the issuer. After establishing an ATM offering program, the issuer has the flexibility to control the timing, amount and price of the sale of equity securities into the market. The flexibility of ATM offerings supports their primary use as a capital management tool. They also provide another route to accessing capital when traditional avenues may be unavailable. It is noted that ATM offerings are generally not used for large-scale financings.
After an ATM program is put in place, there is relatively little management involvement necessary in order to make a sale into the market. The sale notice must be issued to the registered dealer, but there is no requirement for marketing efforts such as road shows on the part of management.
ATM offerings may permit issuers to benefit from rising prices of their equity securities. The flexibility of these offerings makes them particularly useful in times of high market volatility, where traditional methods of raising capital may be too slow and cumbersome to capitalize on short term price increases.
The downside to maintaining an ATM program is that its flexibility must be offset by due diligence and reporting requirements. These requirements will be less onerous when the recent amendments come into effect; however, they remain a consideration for smaller issuers. Further, the introduction of an ATM program creates a potential for an "equity overhang" market impact. The introduction of a large ATM offering program can potentially threaten holders of the issuer's securities with the potential for dilution, and may result in a slight downward pressure on the price of the issuer's equity securities.
Currently, ATM offering rules under NI 44-102 allow issuers to distribute securities using a shelf procedure, however they do not provide exemptions from prospectus requirements. Issuers looking to make an ATM offering must obtain prospectus relief with respect to several obligations, including the requirements to deliver a prospectus, a waiver of the right of purchasers to withdraw from their purchase within two business days, and a waiver of the right of action against the dealer for failing to deliver a prospectus. Prospectus relief currently has to be obtained by the issuer each time it engages in an equity security distribution under its ATM program.
The most significant change in the amendments is to offer issuers an exemption from the requirement to obtain prospectus relief each time it wished to engage in an ATM offering. This exemption increases the flexibility of ATM offerings, and decreases the cost and time associated with engaging in each offering.
The amendments also remove restrictions on the number of equity securities that an issuer can sell into the market under its ATM program. Previously, the market value of securities eligible to be sold through an ATM program was 10% of the market value of an issuer's securities on the last day of the month before the first sale of ATM securities. This requirement will be lifted by the amendments. Additionally, aggregate shares eligible for sale under an ATM offering could not exceed 25% of the daily trading volume of the issuer's securities. This requirement will also be lifted when the amendments come into effect.
Although the strict 10% and 25% caps have been removed, the CSA still expects issuers to ensure that ATM offerings will not have a material impact on the market price of an issuer's securities. As part of this requirement, registered dealers are expected to manage orders to ensure that no material market price impact occurs.
The amendments will also decrease the disclosure requirements issuers face under the current system, requiring disclosure by issuers of the number and average price of securities distributed, proceeds raised and commissions paid under the ATM program on a quarterly basis. Issuers must also ensure that the ATM prospectus continues to constitute full, true and plain disclosure of all material facts through the life of the ATM program.
One obstacle that the amendments did not address is the requirement for issuers to file a prospectus in every jurisdiction where a distribution will occur. Due to the nature of ATM offerings being made directly onto a securities exchange, it is difficult to determine where a purchaser is located at the time of a trade. A purchaser under an ATM distribution may be located in any jurisdiction in Canada, which means that issuers will have to file an initial prospectus to set up an ATM offering program in each Canadian jurisdiction. The amendments did not address a possible exemption from French translation requirements. The Autorité de Marchés Financiers will continue to require issuers to apply for exemptive relief from translation requirements. We understand that these exemptions will now be granted to issuers establishing ATM offering programs as a matter of course.
The CSA's amendments to ATM offering rules come into effect on August 31, 2020, and are expected to decrease the cost, time, and complexity of establishing an ATM equity distribution program. Issuers will not have to obtain prospectus relief for each ATM distribution, and hard caps on the number of securities that can be sold under a program both daily and in aggregate have been removed. These amendments will likely help ATM offerings become a more widely used capital management tool by Canadian issuers.