Proposed New Private Placement Exemption to Existing Security Holder Exemption Needs Your Support

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 “WAKE-UP TSXV and CNSX listed issuers and investors!”

Monday, January 20, 2014, is the cut-off date to submit comments to support Multilateral Instrument 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holders (the Rights Light Exemption) proposal.[1] The Rights Light Exemption if adopted will allow issuers listed on the TSX Venture Exchange (TSXV) to raise capital by distributing securities to their existing security holders using nothing more than a subscription agreement.  No investor questionnaire and no disclosure document like a rights offering circular or prospectus will be required to rely on this exemption.  The Rights Light Exemption, if adopted, has the potential to bring retail investors and much needed capital back into the junior capital markets in Canada. The Rights Light Exemption is subject to the following terms and conditions:

  • the issuer must have a class of equity securities listed on the TSXV;
  • the issuer must have filed all timely and periodic disclosure documents;
  • the offering consists only of the class of securities listed on the TSXV or units comprising the listed security and a warrant to acquire the listed security;
  • the issuer issues a news release disclosing the proposed offering, including details of the use of proceeds;
  • each investor confirms in writing to the issuer that as at the record date the investor held the type of listed security that the investor is acquiring under the Rights Light Exemption;
  • each investor in a 12 month period may not acquire more than $15,000 in the aggregate of the issuer’s securities under the Rights Light Exemption unless the investor obtains suitability advice from a registered investment dealer;
  • issuers must provide investors with rights of action in the event the issuer makes a misrepresentation in its continuous disclosure, or in an offering document it may voluntarily provide an investor; and
  • a report of exempt distribution is filed no later than 10 days after the distribution with all applicable securities regulators.

Securities acquired under the Rights Light Exemption will be subject to the four month hold resale restrictions under section 2.5 of National Instrument 45-102 – Resale of Securities. Issuers and their selling agents selling securities under the Rights Light Exemption will not be able to rely on the Northwestern Exemption from the dealer registration requirement of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations.  Registration, however, will typically not be required if the issuer is not in the business of dealing in or advising with respect to securities. Your written support is necessary to guarantee the Rights Light Exemption will be adopted by the securities regulators in the provinces and territories who put forward the proposal.  Your further demand that the Rights Light Exemption be made available to all venture issuers[2] to raise capital is the only way this exemption will be made available to Canadian Securities Exchange (CSE, formerly the Canadian National Securities Exchange or CNSX) listed issuers and their investors. The securities regulators in Ontario and Newfoundland and Labrador did not participate in proposing the Rights Light Exemption in their jurisdictions.  The Ontario Securities Commission (OSC), however, in a December 2013 news release updating its exempt market review, indicated it would consider whether a Rights Light Exemption should be adopted in Ontario and whether the exemption should be expanded to include issuers listed on other exchanges.[3] Venture issuers resident in Ontario, venture issuers who have investors’ resident in Ontario and all investors resident in Ontario of venture issuers are urged to provide the OSC with a comment letter to support the Rights Light Exemption and its expansion to include all venture issuers. FAIR Canada is expected to submit a strongly worded letter against the proposal cloaked in the premise of protecting retail investors. FAIR Canada is a national, non-profit organization that claims it is the voice of retail investors. It is funded by the OSC and the Investment Industry Regulatory Organization of Canada (IIROC). FAIR Canada’s comment letter will be considered the voice of retail investors by securities regulators, unless an overwhelming number of investors offer written support of the Rights Light Exemption. Don’t let Fair Canada speak for you if you are an investor in support of the Rights Light Exemption.  Submit your own comment letter in support of the proposal and be heard. Attached below are two sample letters in support of the Rights Light Exemption proposal.  Issuers and investors may cut and paste these letters onto their letterhead to send to the CSA participating jurisdictions and Ontario.  Please feel free to customize the letters to reflect your own views, concerns and support for the Rights Light Exemption proposal.  If you would prefer a Word version of these sample letters please send me an email and I will send them to you.

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SAMPLE ISSUER LETTER

[LETTERHEAD]

[DATE]   BY EMAIL: lstreu@bcsc.bc.ca; tracy.clark@asc.ca; and comments@osc.gov.on.ca British Columbia Securities Commission Alberta Securities Commission Financial and Consumer Affairs Authority of Saskatchewan Manitoba Securities Commission Autorité des marchés financiers Financial and Consumer Services Commission (New Brunswick) Nova Scotia Securities Commission Prince Edward Island Securities Office Office of the Yukon Superintendent of Securities Office of the Superintendent of Securities, Government of the Northwest Territories Legal Registries Division, Department of Justice, Government of Nunavut c/o Larissa Streu Senior Legal Counsel, Corporate Finance British Columbia Securities Commission P.O. Box 10142, Pacific Centre 701 West Georgia Street Vancouver, British Columbia V7Y 1L2 c/o Tracy Clark Legal Counsel, Corporate Finance Alberta Securities Commission Suite 600, 250-5th Street SW Calgary, Alberta T2P 0R4 Dear Sirs and Madams, Re:  Multilateral CSA Notice MI 45-312  – Proposed Prospectus Exemption for Distributions to Existing Security Holders. This letter is submitted on behalf of [Name of Company] (the “Company”) in response to the Canadian Securities Administrators (“CSA”) request in the above identified notice (“MI 45-312”) for comments to the CSA concerning the adoption of a new prospectus exemption for distributions to existing security holders of securities of TSX Venture Exchange issuers (the “Proposed Exemption”).   The Company is listed on the TSX Venture Exchange (“TSXV”) [or Canadian Securities Exchange (“CSE”)] and is a reporting issuer in [Name of Province(s)].  The Company has security holders in almost every province and territory in Canada. The Company is in support of MI 45-312 and its goal to expand and expedite capital raising opportunities for small and medium sized enterprises listed on exchanges in Canada. The Proposed Exemption has the potential to assist venture issuers in raising capital more efficiently in Canada.  It also has the potential to provide retail investors the opportunity to participate in unit offerings and discounted private placement offerings of issuers where they are existing security holders of without having to be an accredited investor. We are providing our comments on the Proposed Exemption in response to the specific questions raised in the request for comments in MI 45-312.  Our comments are as follows:

  1. If you are a TSXV issuer, will you use the Proposed Exemption?  Yes.  The Proposed Exemption will provide a broader base of potential private placement investors to the Company.  It will allow the Company to invite existing security holders to make a further investment in the Company on the same terms it now offers to accredited investors only.  The conditions outlined in MI 45-312 and the draft rule regarding the use of the Proposed Exemption does not impose a heavy financial or timing burden on the issuer.  Allowing investors to confirm in writing they are a security holder as of the record date of the offering simplifies what would have otherwise been a difficult task with objecting beneficial owners and delays in obtaining NOBO and OBO lists.
  2. Should the Proposed Exemption be available to issuers listed on other Canadian markets? Yes.  All reporting issuers have the same continuous disclosure requirements under Canadian securities laws and should be treated equally. We see no reason to distinguish TSXV issuers and venture issuers listed on other exchanges for the purpose of eligibility to use the Proposed Exemption.
  3. Investors will only be able to invest $15,000 in a 12-month period unless they obtain advice from a registered investment dealer. Is $15,000 the right investment limit?  No investment cap should be imposed. What is the CSA’s rationale for imposing a $15,000 investment limitation? This numerical cap appears to be arbitrary and unrelated to the regulatory reasons for allowing retail investors to acquire an issuer’s securities under the Proposed Exemption. According to the TSX Group 2012 MiG Report, the average raise size of a TSXV issuer in 2012 was $3.2 million.  Over 213 existing security holders would have to participate in the offering if each investor was subject to a $15,000 investment cap. Requiring this number of investors to participate in an offering would make the cost of capital under this exemption much higher than that associated with using the accredited investor exemption.  Let each existing security holder determine what they want to invest in an offering under the Proposed Exemption. If the CSA insists on an investment cap, the cap amount should be raised to at least $100,000 in a 12 month period.
  4. In what circumstances would it be suitable for an investor that is a retail security holder to invest more than $15,000 in a TSXV issuer?  An investor knowledgeable about the company and its risks should be allowed to decide for his or herself what level of investment is suitable for them.
  5. Do you agree that there should be no investment limit if an investor receives suitability advice from a registered investment dealer?  Yes.  A registered investment dealer is subject to know your client, know your product and client suitability rules.
  6. Do you agree that being a current security holder of an issuer enables an investor to make a more informed investment decision in that issuer?  Yes.  Retail investors who are invested in the company are more likely to have read the public disclosure documents of the issuer versus potential investors recently introduced to the issuer.  Current security holders also have had the opportunity to watch the issuer’s stock trading activity in the market place, and often seek out and talk to management at investment shows.  Existing security holders are informed investors.
  7. What is the appropriate record date for the exemption? Should it be one day before the announcement of the offering or should it be a more extended period? If you think it should be a more extended period, what would be the appropriate period of time?  Record dates serve several different purposes.  There is no reason to extend the record date beyond one day before the announcement in this instance.  There are other means to catch and correct any perceived abuses in the private placement process without restricting the ability of issuers to efficiently raise capital.
  8. We are currently proposing that the exemption be subject to the same resale restrictions as most other capital raising exemptions (i.e., a four month restricted period). However, there are some similarities between the proposed exemption and the rights offering exemption, which is only subject to a seasoning period.
    • Do you agree that a four month hold period is appropriate for this exemption? Yes.  The Proposed Exemption does not require an issuer to provide potential investors with an offering document such as a rights offering circular or a rights offering prospectus which justifies the use of a seasoning period versus hold period.  Under the Proposed Exemptions, existing security holders who participate in an issuer’s private placement are put on equal footing to accredited investors and investors acquiring the issuer’s securities under other available exemptions under National Instrument 45-106 – Prospectus and Registration Exemptions.
    • Should we require issuers to provide additional continuous disclosure, such as an annual information form? No. The need to file an annual information form is one of the reasons the short form prospectus and offering memorandum exemption for qualifying issuers is not used by venture issuers. If an annual information form is required the Proposed Exemption will not be widely used or used at all by venture issuers.
    • If we were to consider a seasoning period for this exemption, should we consider some of the restrictions that apply under a prospectus-exempt rights offering, such as “claw-backs” limiting insider participation?  No comment.
    • If securities offered under the exemption were only subject to a seasoning period, would there be a greater need to ensure investors are made aware of and have an opportunity to participate in the offering?  No comment.
  9. We have not proposed any conditions regarding the structure of the financing, i.e., minimum or maximum price, maximum dilution, or period in which an offering must be completed. We contemplate that the proposed financing would be conducted under the standard private placement rules of the TSXV which, among other things, allow pricing at a discount to market price. Is this appropriate or are there structural requirements that we should make a condition of the exemption? The Proposed Exemption should be allowed to be conducted under the standard private placement rules of the exchange on which the securities are traded.  This class of investor, existing security holders of the issuer, should be treated identical to other exempt market participants.  No additional terms and conditions regarding the structure should apply.

As discussed above we strongly support the CSA’s implementation of the Proposed Exemption with the understanding that it is made available to all venture issuers and not just TSXV issuers.  We also strongly encourage the Ontario Securities Commission and the Newfoundland Labrador Financial Services Regulation Division join the CSA participating jurisdictions in adopting the Proposed Exemption.  It is important that the capital raising exemptions in Canada be harmonized to ensure issuers and investors have the same opportunities wherever they reside. If you have any questions regarding our views, please do not hesitate to contact the undersigned. Yours Truly, [Name of Company] ______________________ [Name], [Position] c:

The Secretary Ontario Securities Commission 20 Queen Street West 22nd Floor Toronto, Ontario M5H 3S8

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SAMPLE INVESTOR LETTER

[INVESTOR ADDRESS] [DATE] BY EMAIL: lstreu@bcsc.bc.ca; tracy.clark@asc.ca; and comments@osc.gov.on.ca British Columbia Securities Commission Alberta Securities Commission Financial and Consumer Affairs Authority of Saskatchewan Manitoba Securities Commission Autorité des marchés financiers Financial and Consumer Services Commission (New Brunswick) Nova Scotia Securities Commission Prince Edward Island Securities Office Office of the Yukon Superintendent of Securities Office of the Superintendent of Securities, Government of the Northwest Territories Legal Registries Division, Department of Justice, Government of Nunavut c/o Larissa Streu Senior Legal Counsel, Corporate Finance British Columbia Securities Commission P.O. Box 10142, Pacific Centre 701 West Georgia Street Vancouver, British Columbia V7Y 1L2 c/o Tracy Clark Legal Counsel, Corporate Finance Alberta Securities Commission Suite 600, 250-5th Street SW Calgary, Alberta T2P 0R4 Dear Sirs and Madams, Re:  Multilateral CSA Notice MI 45-312  – Proposed Prospectus Exemption for Distributions to Existing Security Holders(MI 45-312). I am an investor in several TSX Venture Exchange (“TSXV”) [or/and Canadian Stock Exchange]listed issuers and a resident of [Province].   This comment letter is in response to the notice captioned above (“MI 45-312”) concerning the adoption of a new prospectus exemption for distributions to existing security holders of securities of TSXV issuers (the “Proposed Exemption”). I support the adoption of the Proposed Exemption.  I believe, however, it should be expanded to include all venture issuers and not just TSXV issuers.  I also believe the securities regulators in Ontario and Newfoundland and Labrador should adopt the Proposed Exemption at the same time as the MI 45-312 proposing jurisdictions.  Harmonizing securities laws and treating investors and issuers fairly and equally right across Canada should be a goal all securities regulators in Canada pursue. I want to provide my comments on just a few of the questions outlined in the request for comments in MI 45-312.  Specifically:

  1. Should the Proposed Exemption be available to issuers listed on other Canadian markets? Yes.  All reporting issuers have the same continuous disclosure requirements under Canadian securities laws and should be treated equally. I see no reason to distinguish TSXV issuers and venture issuers listed on other exchanges for the purpose of eligibility to use the Proposed Exemption.
  2. Investors will only be able to invest $15,000 in a 12-month period unless they obtain advice from a registered investment dealer. Is $15,000 the right investment limit?  No investment cap should be imposed. What is the CSA’s rationale for imposing a $15,000 investment limitation? This numerical cap appears to be arbitrary and unrelated to the regulatory reasons for allowing investors to acquire an issuer’s securities under the Proposed Exemption. Let each existing security holder determine what they want to invest in an offering under the Proposed Exemption. If the CSA insists on an investment cap, the cap amount should be raised to at least $100,000 in a 12 month period.
  3. In what circumstances would it be suitable for an investor that is a retail security holder to invest more than $15,000 in a TSXV issuer?  An investor knowledgeable about the company and its risks should be allowed to decide for his or herself what level of investment is suitable for them.
  4. Do you agree that there should be no investment limit if an investor receives suitability advice from a registered investment dealer?  Yes.  A registered investment dealer is subject to know your client, know your product and client suitability rules.  Getting a registered investment dealer, however, to agree to allow you to invest your money in a TSXV issuer is next to impossible.  An investment in a TSXV or CSX issuer is not for investors seeking stable returns, preservation of capital or income.  If you receive suitability advice from a registered investment dealer and still want to invest in an issuer, you should be allowed to invest since it is your money.
  5. Do you agree that being a current security holder of an issuer enables an investor to make a more informed investment decision in that issuer?  Yes.  Investors who are invested in a listed issuer are more likely to have read the public disclosure documents of the issuer versus potential investors recently introduced to the issuer.  As a security holder, you also have had the opportunity to watch the issuer’s stock trading activity in the market place, and talked to management at investment shows and elsewhere.  Existing security holders are informed investors.
  6. We have not proposed any conditions regarding the structure of the financing, i.e., minimum or maximum price, maximum dilution, or period in which an offering must be completed. We contemplate that the proposed financing would be conducted under the standard private placement rules of the TSXV which, among other things, allow pricing at a discount to market price. Is this appropriate or are there structural requirements that we should make a condition of the exemption?   The Proposed Exemption should be allowed to be conducted under the standard private placement rules of the exchange on which the securities are traded.  Existing security holders of the issuer should be treated identical to other investors in a private placement offering.  No additional terms and conditions regarding the structure should apply.

The Proposed Exemption, if adopted, will give investors like me the opportunity to participate in the private placements of venture issuers we already know and have previously invested in.  Currently, it is unfair that as friends, family, associates and investors who do not meet the definition of one of the existing securities exemptions in National Instrument 45-106 – Registration and Prospectus Exemptions, we cannot participate in key rounds of financings of issuers where we are already an existing security holder. We are forced to sit back and watch accredited investors and others get discounted securities and warrants while we can only participate in the secondary trading markets that have less upside.  The Proposed Exemption has the potential to give us equal standing in a high risk market that supports the development of high potential Canadian companies. Thank-you for considering my views on this matter. Yours Truly, ______________________ [Name], [Phone Number] c:

The Secretary Ontario Securities Commission 20 Queen Street West 22nd Floor Toronto, Ontario M5H 3S8

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Notes:

  1. Multilateral CSA Notice MI 45-312  Proposed Prospectus Exemption for Distributions to Existing Security Holders; and concurrently published 45-5XX Exemption from Prospectus Requirement for Certain Trades to Existing Security Holders [BCI Proposed] are together the Rights Light Proposal in British Columbia. The instrument number or order in each province or territory may vary depending on how national and multi-lateral instruments are recognized as laws or rules in that jurisdiction.
  2. Venture issuer is defined in subsection 1.1 of National Instrument 51-102 – Continuous Disclosure Obligations  and means a reporting issuer that, as at the applicable time, did not have any of its securities listed or quoted on any of the Toronto Stock Exchange, a U.S. marketplace, or a marketplace outside of Canada and the United States of America other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc.
  3. Ontario Securities Commission, December 4, 2013, News Release: OSC provides update on exempt market review, including its consideration of existing security holder exemption.

    “The comment period on the CSA proposal closes on January 20, 2014. The OSC supports the CSA proposal and will consider the comments on that proposal in developing its proposed existing security holder exemption, with the goal of substantial harmonization.  As part of the OSC’s review, it will consider whether such an exemption should be available to issuers listed on other exchanges. Commenters are asked to share their comments on the CSA proposal with the OSC by submitting them to the following address:

    The Secretary Ontario Securities Commission 20 Queen Street West 22nd Floor Toronto, Ontario M5H 3S8 Fax: 416-593-2318 Email: comments@osc.gov.on.ca”

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.
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