Regulators to ease path to raising cash from shareholders

Securities regulators in Canada are proposing new rules that will make it easier for companies to enable existing shareholders to buy more shares in the company.

The Canadian Securities Administrators, an umbrella group for provincial securities commissions, issued a new rule proposal Thursday that would remove the current requirement for companies to get a rights offering circular pre-approved by a securities regulator before it can be sent to shareholders.

Rights offerings are supposed to be a quick and easy way for companies to raise money by selling shares to people who are already investors, but they are not widely used in Canada because of hurdles that slow down and complicate the process.

"Although rights offerings can be one of the fairest ways for issuers to raise capital, in that they allow existing shareholders to participate on a pro rata basis, they are seldom used because of the time and costs associated with them," said Bill Rice, chair of the Alberta Securities Commission.

"The proposed exemption is designed to make rights offerings more attractive to reporting issuers by decreasing both the time and costs involved."

A CSA analysis found that rights offerings take far longer to complete on average than other types of similar transactions that can also be done without issuing a prospectus.

A review of 93 rights offerings over the past seven years found the average length of time to complete the offering was 85 days, and the average time between filing a draft of the circular and getting approval from a regulator was 40 days.

The CSA said the time delays were a major factor in many companies' decisions not to use a rights offering to raise funds.

"CSA staff heard that the length of time to complete an offering results in lack of certainty of financing and increased costs," the CSA said in its analysis of the rule change proposal.

In addition to dropping the required regulatory review of rights circulars, the CSA is also proposing to raise the bar on how much stock can be issued under a rights offering.

The new rule would allow dilution up to 100 per cent of the company's existing outstanding shares, an increase from 25 per cent currently. The change would especially benefit smaller companies, which have complained the 25-per-cent limit was too low to allow them to raise sufficient capital to make it worthwhile.

Companies could still do a rights offering above the 100-per-cent dilution level, but would have to do it by issuing a prospectus, which requires detailed disclosure of company information and a review by securities regulators.

The public comment period on the proposed changes ends Feb. 25.

The rights rule amendment comes as the Ontario Securities Commission is ready to adopt a new rule of its own, covering the issuance of other types of securities to existing shareholders. In a rule published Thursday, the OSC said it will create a new exemption to allow companies listed on stock exchanges to easily issue shares to existing shareholders, bringing OSC rules in line with those already in place in most other provinces.

The OSC rule, which is expected to come into effect Feb. 11, does not involve rights issues, which are covered under a separate regulation.

OSC manager of corporate finance Jo-Anne Matear said companies say they need more routes to easily issue shares to existing investors, so the OSC is helping provide a range of alternative methods.

"These exemptions are intended to help facilitate capital formation for that group of issuers," she said Thursday.

Under the OSC share issue rule, investors are limited to acquiring a maximum of $15,000 per year in the company's shares or else have to obtain suitability advice from a registered investment dealer.

There is no similar maximum proposed in the CSA's rights exemption rule, which contains no cap on the amount of rights that can be exercised by a shareholder but would require companies to issue rights on a pro rata basis to all existing security holders.

The exercise price of the rights would have to be set at a level lower than the current market value of the shares. The CSA said a requirement for discounted pricing will allow more retail investors to participate in the offerings.

While investors may lose some protection if rights offering circulars are not reviewed and approved by securities regulators, the CSA said the impact may be mitigated by extending current liability rules to cover rights circulars. The rules allow shareholders to sue over misrepresentations in company documents such as financial statements.

For the first two years after the rule change takes effect, the CSA said it would review circulars after their distribution to see how companies are using the rule and if they are abiding by the new conditions.