Existing Security Holder Exemption Now Available to TSX, TSX-V & CSE Issuers

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As of March 13, 2014, all of the securities regulators in Canada, except Ontario and Newfoundland Labrador, have adopted a new prospectus exemption for distributions to existing security holders by issuers listed on the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX-V) and the Canadian Stock Exchange (CSE) (the existing security holder exemption or the exemption).  Calling a ticker tape parade to welcome this exemption may be an overly-enthusiastic response, but this exemption deserves a warm welcome as it is likely to have a significant beneficial impact on both issuers and non-accredited investors.

The existing security holder exemption was originally released for comment on November 21, 2013 in Multilateral CSA Notice 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holders. The majority of the 241 comment letters sent in by issuers, investors and securities professionals were in support of the exemption. The securities regulators made one minor adjustment from the original proposal before releasing the final existing security holder exemption rule. The rule was expanded to make the exemption available to issuers listed on the TSX and CSE as well as the TSX-V.

To use the existing security holder exemption an issuer must:

  • have a class of equity securities listed on the TSX, TSX-V or CSE;
  • have filed all timely and periodic disclosure documents;
  • offer only a class of securities listed on the exchange or units comprising of the listed security and a warrant to acquire the listed security;
  • issue a news release disclosing the proposed offering, including details of the use of proceeds;
  • obtain from each investor written confirmation they were an existing security holder of the issuer’s listed stock on the record date;
  • provide investors with a right of action in the event of a misrepresentation in the issuer’s continuous disclosure, or in an offering document it may voluntarily provide to investors; and
  • file a report of exempt distribution no later than 10 days after the distribution with all applicable securities regulators.

Each investor in a 12 month period may not acquire more than $15,000 in the aggregate of the issuer’s securities under the exemption unless the investor obtains suitability advice from a registered investment dealer.

Securities acquired under the existing security holder exemption are subject to a four month hold period under section 2.5 of National Instrument 45-102 – Resale of Securities.

Issuers and their agents selling securities under the existing security holder exemption cannot rely on the Northwestern Exemption from the dealer registration requirement of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations.  Issuers, however, will typically not be required to be registered or need to use a registered dealer if they are not in the business of dealing in or advising with respect to securities.

Issuers and non-accredited investors both benefit from the existing security holder exemption.  Issuers can now offer existing security holders who are not accredited investors the opportunity to participate in unit offerings, flow-through offerings and discounted private placement offerings.  These were investment opportunities previously closed to 98% of retail investors.  Issuers up until this exemption were only able to offer these types of private placement offerings to accredited investors and close friends, family and business associates.

Issuers using the existing security holder exemption may want to consider using a registered funding portal or imbedding a crowdfunding plug-in app into their website when raising capital under this exemption.  Funding portals and related plug-in apps allows issuers to leverage social media and attract as many non-objecting-beneficial-owners and objecting-beneficial-owners as possible to the offering on a cost effective basis.  They also take care of the logistics of the offering, making it cost effective to let existing security holders invest as little as $500 or less in the offering.

These are all the links from the British Columbia Securities Commission’s website related to the Multilateral CSA Notice 45-313 Prospectus Exemption for Distributions to Existing Security Holders:

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter at @AlixeCormick or on Google+ at +AlixeCormick.
Article Name
Existing Security Holder Exemption Now Available to TSX, TSX-V & CSE Issuers
The existing security holder exemption is available to all issuers listed on the TSX, TSX-V and the CSE. These are the rules around the use of this exemption.
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Venture Law Corporation
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