New rules exempting some publicly traded companies from filing a prospectus are expected to deliver a “jolt” to junior issuers looking to raise capital amid a slowdown in the markets, according to one expert.
The Canadian Securities Administrators (CSA) revealed earlier this month a new prospectus exemption is expected to go into effect Nov. 22, freeing certain public companies from filing another prospectus if they’re looking to raise between $5 million and $10 million from investors.
Companies can use the exemption once a year but they must have already been trading on a Canadian exchange for at least 12 months before qualifying for the exemption.
CSA chairman Stan Magidson said a statement the time and cost of preparing this kind of detailed financial information can be a barrier to raising capital among smaller companies.
Vancouver-based lawyer Gary Gill, a partner at Sangra Moller LLP who specializes in securities and corporate finance, said prospectus costs can vary but are often in the range of $300,000 to $500,000 once fees associated with lawyers and underwriters are taken into account.
“So if you're raising $5 million, almost 10 per cent could be going to those fees right off the top,” he said, describing those costs as disproportionate with how much capital is ultimately raised.
“It's [the exemption] absolutely cheaper. That's such a significant thing.”
Gill has been fielding calls from clients seeking details on the exemption and he does not expect issuers to take a wait-and-see approach to the upcoming change in rules.
“There's a lot of pent-up demand for startups that want to get their story out there, that need the money, and they would quickly try to take advantage of this new prospectus exemption,” he said, adding the Canadian Securities Exchange and TSX Venture Exchange will likely be on the receiving end of more activity resulting from the exemption compared with the TSX.
The exemption is looking particularly enticing to B.C.’s junior miners, tech companies and startups, Gill said.
“The capital markets are not nearly as robust as they were 12 or 24 months ago. There’s still financing available for good deals, but it's a lot more restrictive,” he said. “And I think this does give a jolt at this time, because the market for junior companies has dried up a lot more than it has for, let's say, mid- or senior- or larger-sized companies.”
A number of industry stakeholders raised some concerns last year that such an exemption could introduce “substantial new risks to market integrity and investor protection” that could undermine confidence in the markets, according to a summary of written comments published by the CSA.
Four out of 10 of those commenters did not support the exemption.
But Gill said provincial regulators have done a “very good job” at addressing concerns the exemption could put investors at risk (securities legislation is the domain of provinces, while the CSA is tasked with harmonizing regulatory initiatives nationally).
Regulators require that the prospectus-exempt issuers file an offering document that makes them subject to secondary market civil liability rules, meaning investors have a right to damages if any misrepresentations are made.
Gill added that buyers also have a right of rescission for 180 days, allowing them to get a full refund on any rescinded investments.
“For the issuers, it does broaden the pool of investors because right now you're restricted to certain classes of people: i.e. accredited investors, family, friends,” he said, referring to the private placements many of these smaller companies often rely on. “So now under this exemption, you can access the market or the public at large.”