Private placements are an efficient way for companies listed on the TSX Venture Exchange (TSXV) to raise capital. With the growth of the cleantech industry in Western Canada, many cleantech companies on the TSXV use private placements to attract direct investment in their businesses, potentially at a discount compared to the market price of their shares.
Completing a private placement is more streamlined and significantly less expensive than completing a prospectus offering. Private placements rely on exemptions from the general requirement to file a prospectus. Common prospectus exemptions used by TSXV-listed issuers include the “accredited investor” exemption and the “listed issuer” exemption, which we discussed in a previous blog.
TSXV-listed issuers looking to raise money through a private placement should consider the following legal and business terms.
Structure of a private placement on the TSXV
Completing a private placement on the TSXV typically involves:
- An initial discussion with potential investors and a review of the business terms of the investment
- Commercial and legal due diligence, depending on the amount of the investment and to the extent the investor requires business information that is not already included in the issuer’s continuous disclosure filings
- Executing a letter of intent with the investor providing the key business terms, including the price at which securities will be issued, the type of securities offered, the closing date, any other rights (such as management rights) or covenants the investor may require
- Issuing a news release announcing the private placement
- Negotiating an investment agreement or subscription agreement with the investors
- Applying to the TSXV for conditional and/or final approval of the private placement
- Issuing a news release announcing the closing of the private placement
- Completing filings with the applicable securities commission(s)
Pricing of the offering
The TSXV permits companies to issue securities at a discount to their market price. Listed companies must first reserve the price of their securities with the TSXV by either issuing a comprehensive news release disclosing the proposed terms of the private placement or, where permitted, filing a price reservation form with the TSXV. A price reservation filing with the TSXV lasts for 30 days unless renewed.
If insiders of the listed company subscribe for more than 25% of the private placement, the proposed offering price (or conversion price) must be reserved by issuing a comprehensive news release, rather than filing a price reservation form with the exchange.
Regardless of whether a listed company has filed a price reservation form or issued a comprehensive news release, the proposed offering price (or conversion price) remains subject to TSXV acceptance.
If the market price of a security is greater than $0.05, the maximum discounts that a listed company can offer an investor are:
| Closing Price | Discount |
| Up to $0.50 | 25% |
| $0.51 to $2.00 | 20% |
| Above $2.00 | 15% |
If the market price for the securities offering is equal to or less than $0.05, the issuer may not apply any discount to the offering. If the market price for the securities offering is equal to or less than $0.05, no discount may be applied to the offering.
For convertible securities, the conversion price must be equal to the market price reserved with the TSXV and no discounts are permitted.
Investment agreement
Investment agreements are often negotiated between the listed company and an investor when the investor makes a significant investment. The key terms of an investment agreement often include:
- Restrictions on the use of proceeds,
- A board nomination or board observation right for the investor,
- Rights to participate in future financings,
- Representations and warranties regarding the listed company, and
- Positive and negative covenants from the listed company.
Warrants
In connection with the private placement of listed shares, the TSXV permits companies to issue warrants that entitle investors to purchase additional listed shares of the company in certain circumstances.
The TSXV imposes the following requirements on companies offering warrants to investors:
- The warrant must be essential to the private placement,
- On exercise, each warrant may entitle the holder to purchase up to a maximum of one listed share,
- An investor can receive up to a maximum of one warrant for each private placement share they purchase,
- The term of the warrants must expire by no later than five years after the date they were issued, and
- The exercise price per share of a warrant must not be less than the market price of the issuer’s listed shares as at the price reservation date.
Under TSXV policy, a listed company may not conduct a private placement involving only the issuance of warrants.
Hold period and share legend
Typically, securities listed pursuant to a private placement will be subject under applicable securities laws to a four-month hold period before the securities can be re-sold. For convertible securities, the hold period begins on the date of conversion, not the date the convertible security is issued.
In addition to any applicable hold period under securities laws, in certain circumstances the TSXV requires that the securities issued in a private placement be subject to a four-month exchange hold period and legended accordingly.
Each listed company must ensure that securities issued from the treasury, that are represented by a certificate, must bear a TSXV legend stating:
“Without prior written approval of TSX Venture Exchange and compliance with all applicable securities legislation, the securities represented by this certificate may not be sold, transferred, hypothecated or otherwise traded on or through the facilities of TSX Venture Exchange or otherwise in Canada or to or for the benefit of a Canadian resident until [insert date].”
If the securities are entered into a direct registration or another electronic book-entry system, or if the purchaser of the securities does not directly receive a certificate representing the securities, the listed company must ensure that the purchaser of the securities receives written notice containing the legend set out above.
Application and approval from the TSXV
TSXV approval is required to complete a private placement. The procedure and application requirements are provided in TSXV Policy 4.1- Private Placements.
The company has 30 days after the price reservation date to file a Notice of Private Placement/Form 4B with the TSXV and request either conditional acceptance or final acceptance.
Once the private placement is accepted and closes, the TSXV issues an exchange bulletin, which confirms the exchange’s final acceptance of the terms of the private placement and its completion.
Closing announcement
Immediately following the closing of the private placement (or the closing of each tranche if the private placement closes in more than one tranche), the listed company must issue a news release.
The news release must include the material details of the Private Placement and must, at minimum, include the following:
- A description of the number and type of securities issued,
- The gross proceeds raised by the company,
- The intended principal uses of the proceeds,
- The particulars of any applicable resale restrictions (including the expiry dates of any hold periods),
- A description of any bonus, finder’s fee, commission, agent’s option or other compensation to be paid in connection with the private placement, and
- If such compensation is paid in securities, a description of the number and type of securities.
If the private placement is a related party transaction, the news release must also include the applicable disclosure as required by TSXV Policy 5.9 – Protection of Minority Security Holders in Special Transactions.
Report on Exempt Distribution
Listed companies that rely on certain prospectus exemptions to distribute securities are required to file a Form 45-106F1 – Report of Exempt Distribution within a prescribed timeframe set out in National Instrument 45-106 – Prospectus Exemptions with the applicable securities commissions disclosing certain terms of the offering.
Looking for advice?
The MLT Aikins corporate finance &securities team has wide-ranging experience advising clients in the clean energy sector across Western Canada. Businesses looking for more information on private placements should contact Mark Mielke.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.