At-the-market offerings & the shelf prospectus
- By Pilot Law LLP
We are occasionally asked whether public companies can conduct at-the-market offerings (ATMs) in Canada. The answer is yes. While they are more common in the U.S., ATMs are also used by public companies to raise capital in Canada.
In a Canadian ATM, an issuer’s equity securities are sold in a non-fixed price offering over one or more securities exchanges or marketplaces by agents at market prices for those securities on that exchange or marketplace at the time of sale. The sales are made from time to time during periods determined by the issuer, as specified in one more notices from the issuer to the agents pursuant to a distribution agreement. Some of the advantages to the issuer of offering equity through an ATM rather than in a typical underwritten offering include:
• the ability to quickly access capital markets and take advantage of favorable pricing windows;
• the fact that sales are made at market prices and the issuer determines the minimum market price at which it is willing to sell the securities;
• the lack of marketing activities, and the related savings in issuer time and resources and
• lower agent commissions, generally.
An issuer wishing to conduct an ATM must be eligible to file a short-form prospectus and must file a base shelf prospectus. After the base shelf prospectus has been cleared by Canadian securities regulators, and at the time the issuer enters into a distribution agreement with the agents, the issuer must file a prospectus supplement that includes specific information about the ATM, including the names of the agents, the terms of the distribution agreement, and the maximum number of securities that will be sold in the ATM. That maximum number cannot be greater than 10% of the aggregate market value of the issuer’s outstanding securities of the class of securities to be sold. The calculation of the aggregate market value must generally exclude the number of securities held by holders of 10% or more of such securities. For more information regarding the process for filing a shelf prospectus in Canada, see our previous post “With a shelf prospectus you are ready to act when the market is favourable“.
Due to the over-the-exchange method of selling the securities in an ATM, neither the issuer nor the agents will know the identity of the purchasers. As a result, before filing the prospectus the issuer will also need to apply for and receive a number of exemptions from rules normally applicable to prospectus offerings in Canada, including:
• from the requirement to physically deliver a copy of the prospectus to purchasers in the offering;
• permitting it to advise purchasers in the supplement filed on SEDAR that the right of purchasers to withdraw their purchase within two business days after the delivery of the prospectus does not apply to securities purchased in the ATM; and
• permitting the issuer to similarly advise purchasers that the right of action against dealers for failure to deliver a copy of the prospectus also does not apply.
This step may be partly responsible for the less frequent use of ATMs in Canada than in the U.S.
The exemptive relief orders generally include a condition restricting the issuer from distributing through Canadian securities exchanges as part of the ATM on any one trading day more than 25% of the trading volume of the offered security over those exchanges on that day. The exemption orders also require the issuer to file monthly reports, following any month in which it has sold securities in the ATM, disclosing the number of shares distributed during the month, the average price, gross proceeds, net proceeds, and commissions paid. In connection with ATMs in which there is sufficient liquidity in the equity security being offered, Canadian securities regulators have permitted the issuer to disclose this information in its interim and annual reports, rather than requiring it to file special monthly reports. Because the prospectus supplement must contain full, true, and plain disclosure at the time of each sale pursuant to the ATM, the exemptive orders also require the issuer to file and incorporate by reference into the supplement a “designated news release” upon the occurrence of a change in a material fact, and a material change report upon the occurrence of a material change. The issuer may also choose to amend the prospectus supplement under certain circumstances.
If you would like more detailed information regarding ATMs and whether they may be right for your company, please contact us.