In the second part of our interview with Socium Law Founder and President Will Van Horne we covered some of the ways that LIFE compares to other exemptions as well as some of the creative ways it is being used in deals.
Don't forget to read through part one of the interview where Will explains the background to the LIFE exemption and some notable uses so far.
Katipult: What are some of the advantages of using the LIFE exemption for private placements?
Will Van Horne: The main advantage for an issuer is that it allows investors who do not qualify under other prospectus exemptions, such as the common Accredited Investor or Family, Friends and Business Associates exemptions, to invest in a company.
In private placements, Issuers can now use the LIFE exemption in conjunction with other prospectus exemptions to maximize their investor pool. Another advantage of this exemption is that the shares issued through it are freely tradable, as opposed to those issued through other exemptions, which can be subject to hold periods. The ability to distribute freely tradable securities immediately can potentially benefit the market for and liquidity of an issuer's securities.
Katipult: And how does this compare and contrast against other types of exemptions?
Will Van Horne: While this exemption is more inclusive of different investors in comparison to other prospectus exemptions, it is limited by the types of issuers that may use it, the amount of funds that may be raised by it, and the use of proceeds that funds raised through it may be used for.
While exemptions such as the Accredited Investor exemption and the Family, Friends and Business Associates exemption limit the pool of investors, the amount of money that may be raised through these exemptions and the use of proceeds is not limited. Under this exemption, issuers are also limited to issuing listed equity securities and warrants to purchase the same.
Katipult: just expanding on that a little, what scenarios would you recommend LIFE to help with a raise?
In scenarios where listed issuers have limited or waning access to capital in private markets under the usual prospectus exemptions, it is ideal for them to use this exemption when they can identify better opportunities for capital raising in the public market or where they can engage an agent to help them find retail investors.
For a listed issuer seeking to raise capital in public markets in each case where the funds are intended to be used for working capital purposes and within the limits needs to be raised, it will be more cost and time effective for a company to raise funds through this exemption as opposed to a short form prospectus, especially as this exemption can be used in conjunction with other exemptions.
Katipult: Does the size of the company come into play? Do smaller companies typically use it?
Will Van Horne: Based on the funding limits imposed on this exemption, the intention seems to be that it should be used by smaller companies. As most issuers who would be using this exemption would be smaller venture-listed companies, the general warnings regarding the risks of this type of investment would apply. It should be noted that there is nothing preventing larger companies from using this exemption, except in cases where they would need to raise much larger amounts.
Katipult: Can you expand on some of these creative uses of LIFE with other exemptions?
Will Van Horne: Yes, we touched on the case of the hybrid financing by Luminex Resources in January and February of this year. What was particularly interesting in that deal was the company offered securities to investors under its brokered offering pursuant to both the LIFE exemption and Accredited Investor exemption, with purchasers under the brokered offering receiving a fixed ratio of both freely tradeable units under the LIFE exemption and units subject to four-month hold periods under the Accredited Investor exemption.
Katipult: From a compliance perspective, what are some of the risks and challenges associated with using LIFE for issuers? Are there any situations issuers should avoid, even if it seems like a good fit?
Will Van Horne: To use the exemption, issuers must issue a press release and the Listed Issuer Financing Document, Form 45-106F19, to disclose the offering. This disclosure must contain all material facts not disclosed in the issuer's periodic and timely disclosure over the last 12 months as well as the details of the offering.
The risk associated with this is exposure to secondary market statutory liability in the case where there may be a material omission or misrepresentation. In such a case, investors will have rights, including damages against the issuer, its directors and officers.
The challenge in using this exemption includes all of the requirements we talked about earlier that an issuer must meet to use the exemption. There are large time and monetary costs associated with becoming a listed issuer in the first place.
It is also worth noting that it is not worthwhile to issue securities under this exemption to officers, directors and other insiders of a company, as those shares will not have the benefit of being freely tradeable on issuance.
Katipult: And are there any risks that investors should be thinking about? Can this type of raise cause more price volatility in the company’s stock?
Will Van Horne: Theoretically, this is a possible risk where freely-trading shares are issued to retail investors who may be less predictable in their investment and trading strategies, however, it does not seem likely.
If this exemption is used to maintain funding for low cap listed issuers, this may contribute to greater stability in markets broadly by supporting the working capital needs of these companies.
More broadly, the CSA relies on the continuous disclosure requirements that listed issuers are subject to in order to ensure that investors are adequately informed regarding their investment as well as the additional disclosure required by the offering document. Investors are provided warnings in the offering document and have means of enforcing their statutory rights in regard to secondary market liability.
Katipult: Are there any restrictions on how LIFE offerings can be marketed and sold to investors? Do issuers or broker-dealers need to use certain processes when engaging with investors?
Will Van Horne: Investors can learn about offerings made under this exemption through the press release issued and the offering document filed by the company. The use of registered dealers to help market and sell the subject securities is central to the process.
The offering document includes a statement on the cover page that investors should seek the advice of registered dealers. The offering document must also include disclosure regarding dealers and finders who have been engaged in connection with the offering. This disclosure includes the compensation to be received by these individuals in connection with an offering and whether these dealers have any conflicts of interest.
Katipult: Are there other disclosures that the issuing company has to make?
Will Van Horne: Yes, the information provided to investors includes the periodic and timely disclosure documents filed by a reporting issuer and the information included in the offering document, which would disclose subsequent information not disclosed in the periodic and timely disclosure documentation.
Part of the reasoning behind this exemption is that reporting issuers have already disclosed enough information publicly for investors to rely on, making a prospectus redundant in cases where limited capital is being raised. This streamlined disclosure may also prove more accessible and comprehensible to an investor.
Katipult: From the regulator's perspective, can you provide insights into how they view the LIFE exemption? And do you think it is working how they envisioned it being used?
We don’t know for certain how regulators view the exemption or if they think it is working as originally envisioned, given it is still new. I think we can say, cautiously, that having adopted it, regulators likely believe that it is working to properly balance investor protection's regulatory objectives and increase capital markets' efficiency.
Part of the reason we need to be cautious is that we only have a limited sample size to assess the merits or success of the exemption. If we think about the underlying rationale of creating more opportunities for capital raising for relatively smaller issuers through reliance on periodic and timely disclosure, we think that it is a promising method, but time will tell if it is successful.
Katipult: In this regard, how will it be judged as being successful?
Will Van Horne: I think for regulators, this would likely mean that regulatory objectives are being met, but it would require regulators to consult with market participants in an ongoing dialogue.
For investors, without being able to look behind each financing, it is difficult to say whether it is providing broader access to retail investors in practice and theory. That said, in our experience, it does appear to be achieving the intended benefits identified by the CSA.
Katipult: Finally, how do you see the use of the LIFE exemption evolving in the future? Do you have any thoughts if the capital limit will increase?
Will Van Horne: It is possible that the capital limit may be increased but the primary justification behind the use of this exemption is that periodic and timely disclosure is an adequate means of informing investors when weighed against the capital needs of smaller issuers.
So potentially, the greater weight regulators attribute to continuous disclosure as a means of investor protection could mean that regulators see this as a method of financing appropriate for larger issuers as well.
As a counterpoint, it is worth noting that larger issuers tend not to struggle with the costs of raising money by means of a prospectus, so regulators may not see a need to supply this relief to larger issuers.
Katipult: Thank you for your time Will, it will be interesting to see how the LIFE exemption is used in the coming months and years.