Editor’s note: This is general educational information about how rights offerings work under Canadian securities law and TSX Venture Exchange policy. It is not investment or legal advice. Everything below is drawn from the instruments, forms and exchange policies listed at the end.
Analysis: the disclosure obligation is the real protection
Nothing in this framework limits how much a non-participating holder can be diluted, short of the 100% ceiling on the class. What the rules do instead is force the number into the open. Form 45-106F15 requires the circular to answer, in bold, the question of how much a holder’s securities will be diluted if the rights are not exercised, to give that answer as a percentage, and to state the assumptions used. A shareholder does not have to compute the effect. The issuer has to publish it.
The price condition works in the same direction and is easy to misread. Requiring a subscription price below the market price is not a concession to shareholders. It is what makes the right worth something, and therefore what gives a holder who cannot or will not put up more money a saleable asset instead of a worthless one. The transferability requirement in Policy 4.5 completes that logic: a right that must be transferable, and that is priced below market, has a value that can be realised. The two provisions together turn dilution from a loss into a choice between paying and selling.
The timing rules mark the outer edge of that choice. Twenty-one days is the floor and 90 days the ceiling under the instrument, and the exchange demands the same 21 calendar days from the date the document goes out. Rights are among the few listed instruments whose entire life is measured in weeks, which is why the exchange fixes the minute they stop trading and forbids changes to the exercise price once they exist.
What a rights offering does not establish is anything about the company’s prospects. The closing news release tells a reader how much money came in, how much of it came from insiders as a group, and how much a guarantor had to absorb. A high take-up under the additional subscription privilege and a small stand-by allocation describe an offering that existing holders wanted. The reverse pattern describes one they did not. Those figures are disclosed for exactly that comparison, and they arrive after the decision to exercise has already been made.
What the documents say
A rights offering is the rare corporate action that can leave a shareholder holding exactly the same certificate and a materially smaller claim on the company. Nothing is taken away. New shares are simply sold to whoever exercises, at a price the existing holders were offered first, and anyone who declines ends up owning a smaller fraction of a larger company. Canadian rules do not prevent that outcome. They regulate the terms on which it is allowed to happen and force the issuer to state the size of the effect in writing.
The exemption that makes a rights offering cheap
Most Canadian rights offerings by reporting issuers run under section 2.1 of National Instrument 45-106, which removes the prospectus requirement if a list of conditions is met. The issuer must have filed all the periodic and timely disclosure documents it was required to file. Before the exercise period begins it must file and send a rights offering notice, Form 45-106F14, to all security holders resident in Canada of the class to be issued, and it must concurrently file a rights offering circular, Form 45-106F15.
The basic subscription privilege must be available on a pro rata basis to those holders. The subscription price must be lower than the market price of the security on the day the notice is filed, or, where there is no published market, lower than fair value unless the issuer bars its insiders from increasing their proportionate interest through the exercise of rights or a stand-by commitment. The circular must carry the statement that there is no material fact or material change about the issuer that has not been generally disclosed.
Three limits sit at the end of the section and define the shape of the whole exercise. The exemption is unavailable if the offering would produce an increase of more than 100% in the number of outstanding securities of the class, counting all rights distributions in the 12 months before the circular date. It is unavailable if the exercise period is less than 21 days or more than 90 days. And it is unavailable if the issuer agrees to pay a higher solicitation fee for exercises by new holders than for exercises by people who were already security holders.
Additional subscription, stand-by guarantors and the arithmetic of the leftovers
An issuer may add an additional subscription privilege, which allows holders who exercise in full to bid for the shares left behind by holders who did not. The instrument fixes how those leftovers are divided. Each holder receives the lesser of what they subscribed for and the amount produced by the formula x(y/z), where x is the aggregate securities available through unexercised rights after the basic subscription privilege, y is the number of rights the holder exercised under the basic privilege, and z is the aggregate rights exercised under the basic privilege by everyone subscribing for additional securities. The price for the additional privilege must equal the basic price.
A stand-by guarantor takes the residual. Where an issuer uses one, it must have granted the additional subscription privilege to all rights holders, must state in the circular that it has confirmed the guarantor’s financial ability to perform, and must price the stand-by at the basic subscription price. Where the circular says no securities will be issued unless a stand-by commitment is provided or a stated minimum is raised, the money must sit with a depository, either a Canadian financial institution or a registered dealer acting as managing or soliciting dealer, under an agreement requiring full return of the funds if the condition is not met.
On or as soon as practicable after closing, the issuer must issue a news release setting out the aggregate gross proceeds, the securities distributed under the basic privilege split between insiders as a group and everyone else, the same split for the additional privilege, the securities taken under any stand-by commitment, the class total outstanding at closing, and any fees or commissions paid.
What the exchange adds on timing and price
TSX Venture Exchange Policy 4.5, as at May 27, 2024, layers exchange mechanics on top. Rights must be transferable, and the issuer chooses whether to list them. At least five trading days before the record date, all exchange deficiencies must be resolved, the terms must be final, and the issuer must put out a news release disclosing them. The offering must stay open for not less than 21 calendar days after the offering document is sent.
If the rights are listed, they begin trading at the opening on the record date, and at that same moment the underlying shares begin trading on an ex-rights basis, meaning buyers from then on are not entitled to the rights. The policy’s own worked example places the last day to trade cum-rights on the day before the record date. On expiry day, trading in the rights stops at 9:00 a.m. Vancouver time, 10:00 a.m. Calgary time and 12:00 noon in Toronto and Montreal, and the rights should not expire less than three hours after that so settlement can complete. Once rights have been issued the exercise price and expiry date cannot be amended, with an exemption available only in extremely exceptional circumstances such as a postal disruption, and only if the rights have not traded.
A stand-by guarantor may be paid a bonus only in the form of a non-transferable warrant for no more than 25% of the shares it agreed to acquire, priced at not less than the market price before the announcing news release and never below $0.05, expiring no later than five years after performance could be required. Consideration under a stand-by commitment must be cash. Where a person could end up controlling more than 10 percent of the voting rights as a result of the offering, a personal information form must be filed and cleared before the exchange will accept the offering.
