The facts of LIFE: New guidance on the listed issuer financing exemption in Canada

Since November 2022, issuers have been permitted to make offerings in Canada of freely tradeable securities without a prospectus, in reliance on the listed issuer financing exemption (commonly referred to as "LIFE" offerings). See our previous article on the introduction of the exemption here. Canadian securities regulators have now published additional guidance on the use of the exemption, answering frequently raised questions and providing their preliminary observations on offerings that have relied on the exemption.

Key highlights from Canadian securities regulators. 

1. Issuers must address any defaults under securities legislation before using the exemption.
2. Issuers should consider costs of business objectives, cash flow from operations, working capital requirements and additional committed funding when determining whether they can reasonably expect to have available funds to meet their business objectives and liquidity requirements for 12 months following a distribution relying on the exemption.
3. Issuers can close an offering under the exemption in multiple tranches; however, if the issuer establishes a minimum offering amount, it must raise at least that amount in the first tranche of the offering.
4. Combining offerings under the exemption with other prospectus-exempt offerings is permissible provided the requirements of each prospectus exemption are met (including applicable hold periods).
5. Where the offered securities in the LIFE offering are units composed of common shares and warrants, the calculation of the 50% dilution limit must include the common shares issuable on exercise of those warrants.
6. The calculation of the maximum dollar amount of a unit offering does not include the value of common shares issuable on exercise of any warrants.
7. Flow-through shares and charitable flow-through shares may be issued pursuant to the exemption. Broker warrants and securities issued in settlement of debt are not eligible for distribution under the exemption.
8. Bought deal offerings need to be properly structured to be conducted under the exemption.
9. Using the exemption in Québec concurrently with a prospectus offering in other provinces is not permitted, as it is seen as a circumvention of the prospectus language requirements.
10. A subscription agreement is not required under the exemption but is recommended for issuers to protect their interests.

Qualification to use the exemption.

The exemption largely relies on an issuer's public disclosure record, supplemented by a short public disclosure document that is not reviewed by securities regulators before use. As such, issuers must address any defaults under securities legislation to make use of the exemption. Provincial and territorial securities regulatory authorities in Canada maintain lists of issuers in default that issuers should consult prior to launching an offering that relies on the exemption.

In addition, issuers need to address comments from Canadian securities regulators on non-compliant disclosure documents prior to any issuance of securities under the exemption.

Available funds requirement.

An issuer must reasonably expect to have available funds to meet its business objectives and liquidity requirements for 12 months following a distribution relying on the exemption. As with an offering under a prospectus, the offering document used in connection with the exemption needs to provide a breakdown of how the issuer will use available funds.

The guidance from Canadian securities regulators includes considerations for issuers when determining the sufficiency of funds, including the costs of business objectives, cash flow from operations, working capital requirements, and additional committed funding during that period. An issuer can establish a minimum offering amount to ensure that following an offering under this exemption, the issuer has sufficient funds to meet its business objectives and liquidity requirements for 12 months following the distribution.

Issuer's ability to close an offering in multiple tranches.

An issuer can close an offering under the exemption in multiple tranches; however, if the issuer establishes a minimum offering amount, it must raise at least that amount in the first tranche of the offering. All tranches of an offering under the exemption must close no later than the 45^th day after issuing and filing the news release announcing the offering.

Types of securities that may be issued under the exemption.

The exemption limits the eligible securities to listed equity securities and units consisting of listed equity securities and warrants exercisable into listed equity securities. The Canadian securities regulators have clarified that flow-through shares (typically used by mining issuers) and charitable flow-through shares may be issued pursuant to the exemption. Broker warrants and securities issued in settlement of debt are not eligible for distribution under the exemption.

Under the exemption, an issuer cannot dilute by more than 50 per cent the issuer's number of listed equity securities that was outstanding as of the date 12 months prior to the news release launching the LIFE offering. The Canadian securities regulators have clarified that in the case of an offering of units, the calculation of the 50 per cent dilution limit must include the common shares issuable on exercise of the warrants.

The value of common shares issuable on exercise of warrants is not included in the calculation of the "total dollar amount of the distribution", which remains up to a maximum of either $5,000,000 or the amount equal to 10 per cent of the market value of the issuer's listed securities (up to a maximum of $10,000,000), whichever is greater.

Types of offerings using the exemption.

The Canadian securities regulators note that bought deal offerings relying on the exemption raise concerns regarding the purchaser's rights, underwriter obligations, and compliance with exemption conditions. The guidance suggests that bought deal offerings should only be conducted under the exemption if structured to address those concerns.

Combining offerings under the exemption with other prospectus-exempt offerings is allowed, provided the requirements of each prospectus exemption are met (including applicable hold periods).

Using the exemption in Québec concurrently with a prospectus offering in other provinces is not acceptable, as it may be seen as an attempt to circumvent translation requirements for a prospectus offering in Québec.

The exemption does not require an issuer to use a subscription agreement; however, issuers should consider using a subscription agreement as it will typically include representations, warranties and acknowledgments made by a purchaser to protect the issuer.

Should you have any questions or require assistance in connection with the matters covered by this article, please feel free to reach out to a member of our Capital Markets group.