The SEC Issues No-Action Letter On Use Of Form F-7 In Connection With Canadian Rights Offerings
BACKGROUND
In December 2015, the Canadian Securities Administrators (the “CSA”) brought into force an amended regime for prospectus-exempt rights offering’s in Canada (the “Amendments”). The Amendments by the CSA were intended to create a more efficient process in conducting a rights offering by reducing the time and cost associated with such offerings and to revitalize an important capital raising tool for Canadian public companies. The CSA has noted that rights offerings are “one of the fairer ways for issuers to raise capital as they provide existing security holders with an opportunity to protect themselves from dilution.”1
The United States and Canadian capital markets are highly intertwined, and it is common for Canadian issuers to have a U.S. shareholder base that must be considered in the context of a rights offering.
Prior to the Amendments, a Canadian public company conducting a rights offering, and eligible to use the Multi-Jurisdictional Disclosure System (“MJDS”), would be able to include its U.S. shareholder base by registering the securities offered in the rights offering with the United States Securities and Exchange Commission (the “SEC”) on Form F-7 under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”). The Adopting Release for the MJDS explicitly stated that for purposes of the MJDS, Canadian disclosure documents prepared in accordance with Canadian law are satisfactory to meet United States disclosure requirements2, as such Form F-7 was adopted in order to ensure U.S. shareholders were not excluded from Canadian rights offerings. Prior to the Amendments, a rights offering in Canada was typically conducted by drafting a substantial disclosure document such as a prospectus or rights offering circular. Form F-7 allowed the extension of such rights offering to U.S. shareholders by attaching the prospectus or rights offering circular as an exhibit to the Form F-7 (with minor changes for U.S. securities law compliance) and filing that document with the SEC.
THE CONCERN
While the new Canadian rights offering regime revitalized the market in Canada for rights offerings, it raised several questions regarding the use of Form F-7 for the extension of rights offerings to U.S. shareholders. The filing of Form F-7 is considered a registered offering and creates liability for the issuer under the U.S. Securities Act for any material misstatement or omission to state a material fact in the offering documents. Prior to the Amendments, the use of Form F-7 was partly premised on the basis that the Canadian prospectus or rights offering circular was a robust disclosure document. However, following the Amendments there was uncertainty as to whether Form F-7 could be utilized in the new Canadian rights offering regime given the limited amount of disclosure required, the lack of regulator review of the rights offering materials in Canada and concerns of how to protect against U.S. Securities Act liability given the limited disclosure requirements in the new regime.
As a result, since the Amendments Canadian issuers typically have not included their U.S. shareholders in their rights offerings.
THE NO-ACTION
In February 2017, the SEC published a no-action letter confirming the availability for use of Form F-7 to register under the U.S. Securities Act the securities offered in a rights offering conducted in Canada by a Canadian reporting issuer under Section 2.1 of Canada’s National Instrument 45-106 (“NI 45-106”), as amended by the CSA.
However, as part of issuing the no-action letter, the SEC relied in part on the representations made in the incoming letter and request for no-action, that:
“. . . an issuer would need to assure that the registration statement and the prospectus satisfied the antifraud and liability provisions under the U.S. Securities Act. . . To do so, for purposes of the offering materials made available to U.S. holders, the issuer could provide a brief description of its business, risk factors, discussion of results of operations and capital resources and such other matters as it deemed material or otherwise in the offering circular. An issuer that is not an SEC registrant could file as exhibits to the Form F-7 its most recent Annual Information Form (if applicable), financial statements, MD&A, information circular, and its Material Change Reports and other applicable continuous disclosure documents, as prepared in accordance with Canadian securities law requirements, and similarly could incorporate those materials by reference . . .”
As a result, it appears that the SEC will not object to rights offerings of Canadian issuers under NI 45-106, as amended by the CSA, extended to U.S. Shareholders and registered under Form F-7. However, a Canadian issuer must include the notice and the rights offering circular as required under the Amendments along with sufficient information to protect itself from liability under the U.S. Securities Act for material misstatements or omissions.
Canadian issuers have been eagerly waiting for this green light from the SEC, because since the Amendments Canadian issuers have typically been excluding U.S. shareholders from their rights offerings. However, it remains to be seen how the SEC’s no-action position will play out in practice. Canadian issuers will need to strike a balance between the amount of disclosure included and/or omitted in the Form F-7 registration statement against the potential U.S. Securities Act liability and whether the SEC requirements create a more burdensome obligation than the effort may be worth.
If you are an issuer contemplating a rights offering or would like more information regarding the foregoing please contact Daniel D. Nauth at 416-477-6031 or dnauth@nauth.com.
1 https://www.osc.gov.on.ca/documents/en/Securities-Category4/ni_20150924_45-106_amd-rights-offerings.pdf
2 Securities Act Release 33-6902 (June 21, 1991) at page 8.