Shelf Prospectus – Seven business days from deal announcement to cash in the bank.

On February 13, 2018, our client eCobalt Solutions Inc. announced a $26 million bought deal financing, with a 15% over-allotment option. The financing closed on February 23, with the over-allotment option being exercised by the underwriters in full, resulting in gross proceeds to eCobalt of $29.9 million.  With a shelf prospectus in hand, eCobalt was ready to act: Seven business days from deal announcement to cash in the bank.

Exploration and development stage mining and oil & gas companies generally finance operations through securities issuances until they become cash flow positive.  However, in volatile markets financing windows can open and close rapidly, so timing is crucial.  The quicker the market can be accessed, the less the risk.  Speedy access to capital is where a shelf prospectus offers one of its biggest advantages.

What is a Shelf Prospectus?

A shelf prospectus is a short form prospectus that permits companies to offer, from time to time over a 25-month period, up to a maximum aggregate dollar value of one or more types of securities (including preferred shares, common shares and/or debt securities). The base shelf prospectus contains, or incorporates by reference, disclosure not specific to a particular offering of securities (i.e., it omits so-called “shelf information”). When a company decides to access the market by offering securities, a brief prospectus supplement disclosing the “shelf information,” including the specific terms of the securities being offered, is incorporated by reference into the base shelf prospectus and provided to investors. The base shelf prospectus will state the maximum dollar amount and types of securities which can be issued over the relevant 25-month period. Both the maximum dollar value amount and the types of securities qualified by the base shelf prospectus can be set at the discretion of the company.

Who can file a Shelf Prospectus?

Any company that is eligible to file a short form prospectus may file a base shelf prospectus.  The principal requirements to be able to file a short form prospectus are:

• the company must be a “reporting issuer” in at least one jurisdiction of Canada and file documents electronically;
• the company must have filed with the securities regulatory authority in each jurisdiction in which it is a “reporting issuer” all periodic and timely disclosure documents that it is required to have filed in that jurisdiction;
• the company must have, in at least one jurisdiction in which it is a “reporting issuer”,
  • current annual financial statements, and
  • a current AIF;
• the company’s equity securities must be listed and posted for trading on a short form eligible exchange; and
• the company must not be an issuer
  • whose operations have ceased, or
  • whose principal asset is cash, cash equivalents, or its exchange listing.

Technical Reports

Companies filing a prospectus must have current technical reports on their material mining and oil & gas properties at the time of filing.  These reports (in form NI 43-101 F1 for mining and NI 51-101 F1 for oil & gas) are reviewed in detail by commission staff and may have to be revised and reissued.   Non-compliant technical reports are the principal reason for denying prospectus receipts for mining and oil & gas issuers.  By filing a base shelf prospectus, issuers reduce the risk that their technical reports will prevent the completion of future financings since the technical reports are only reviewed at the time of filing the base shelf prospectus and not when the market is accessed through the filing of a prospectus supplement.

Advantages of a Shelf Prospectus

• Quick access to markets: Generally one week from deal terms announced to closing and cash in the bank.
• Flexibility: In addition to ordinary equity, units, warrants and debt securities may be offered under the base shelf prospects.
• Certainty: Prospectus supplements are not generally reviewed by securities commissions.  Many financings have been interrupted and, in some cases, derailed by securities commission review of the offering company’s technical reports.  Filing a base shelf prospectus ensures that the technical reports are not reviewed each time the market is accessed.
• Less cost: Once a base shelf prospectus has been filed, accessing the capital markets requires only finalization of a prospectus supplement – a much less complex document than even a short form prospectus. This results in lower future financing costs for the issuer.
• Attractiveness to Agents/Underwriters: The ability to close a shelf prospectus financing quickly means less market risk for agents and underwriters, making it more likely they will agree to assist with a financing at any given time.
• Security: Once filed, a base shelf prospectus is valid for 25 months and permits ongoing financing from time to time of up to the dollar amount stated in the prospectus.
• Marketing: After a receipt has been issued for a base shelf prospectus, securities regulators do not have the same regulatory concerns about “marketing” before the filing of a shelf prospectus supplement as they do about “pre-marketing” before the filing of a short form prospectus or a long form prospectus.

Market Perception

There has been a perception that filing a shelf prospectus will signal imminent financing and create a market overhang.   Our experience is that negative market reaction, if any, is temporary.  In the junior resource sector, investors anticipate future dilution on the understanding that there are no cash flows from operations to fund necessary exploration and development.

It would be our pleasure to further discuss with you how your company can benefit from a shelf prospectus.

For information on when to file a shelf prospectus click here for our post “WHEN IS THE BEST TIME FOR A COMPANY TO FILE A SHELF PROSPECTUS”.