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A quicker and more cost-effective rights offering

Corporate Finance, Public Companies by

Recent amendments to National Instrument 45-106 – Prospectus Exemptions (“NI 45-106“) have made conducting a rights offering much quicker and more cost-effective. The new rights offering exemption in Section 2.1 of NI 45-106 now allow you to avoid a review by the regulators on your rights offering circular. In the past the average rights offering would take about 85 days; of which the regulatory review could have taken up to 40 days. You can now get that much needed funding into your company quickly.

Parameters of the Rights Offering

In order to maintain your prospectus exemption, you need to ensure that your offering falls within these limits (amongst other requirements):

  • the rights offering cannot increase the issued and outstanding (or principal amount of debt) by more than 100%;
  • the exercise period cannot be less than 21 days and no more than 90 days;
  • the basic subscription privilege is available on a pro rata basis to the security holders, resident in Canada, of the class of securities to be distributed upon the exercise of the rights; and
  • you cannot pay a fee to solicit the exercise of rights by new holders that is great than the fee paid to exercise the rights by current holders.

Pricing the Rights Offering

For publicly companies, the subscription price for a security to be issued upon the exercise of a right must be lower than the market price of the security on the day the rights offering notice is filed. You are still subject to the stock exchange’s minimum price on a private placement.

Sending Notice and Circular

The new rights offering exemption requires you to send a Form 45-106F14  – Rights Offering Notice to all securityholders in respect of the offering and file the Form 45-106F15 – Rights Offering Circular on SEDAR at the same time. You are only required to send the notice and not the circular. This cuts down on printing and mailing costs dramatically. Moreover, the regulars have stated that the notice should only be 2 pages – meaning that you aren’t required to cram in too much information into the notice itself.

Stand-By Guarantor

What is very interesting about structuring a rights offering through NI 45-106 is that the guarantors of the stand-by commitment are also exempt when they purchase pursuant to the offering. A stand-by guarantor is a person or entity who offers to purchase any securities not acquired by current securityholders under the rights offering. The guarantor can be an existing securityholder or someone completely new to the company. There can be multiple guarantors in respect of a rights offering.

We have seen in recent venture deals that the stand-by guarantor fee is 25% of the commitment paid in warrants that have a 24-month term and on the same subscription price as the rights offering.

The Canadian Securities Administration has made it clear that the stand-by guarantor is subject to the same seasoning period as the purchasers of the rights offering – this means in most cases that the stand-by guarantor is freely trading on day one.

Free-Trading on Day 1

Securities issued pursuant to a rights offering are subject to a “seasoning period”. However, in most cases as long as the issuer has been a reporting issuer for more than 4 months the securities issuable pursuant to the rights offering will be free-trading on day 1.

Cross-Border Issues

This exemption is only available to Canadian residents so if you plan on having non-Canadian residents participate you will need other exemptions – different legending on the certificates may be required if you are even able to sell to foreign holders.

Fixed-Fee Offering

Corporate Counsel will help you to get your NI 45-106 rights offering done quickly and very cost-effectively. We offer a fixed-fee approach to completing your offering at a fraction of what you would pay at a Bay Street firm. Contact us today for more information.