Canada: TSX Provides Guidance For Companies Seeking To List

On November 7, 2013, the Toronto Stock Exchange published staff notice 2013-0003 providing guidance on: (i) the meaning of "economically interesting grades" in its original listing requirements for mineral exploration and development-stage companies; (ii) the pricing of stock options granted prior to an issuer's initial public offering; and (iii) financial statements submitted to the TSX in support of an original listing application.

1. Economically Interesting Grades – The Importance of Infrastructure on Remote Properties

Issuers applying to list on the TSX under the "mineral exploration and development stage" category must have an advanced property, meaning a property where the continuity of mineralization is demonstrated in three dimensions at "economically interesting grades" as evidenced by a National Instrument 43-101 – Standards of Disclosure of Mineral Projects compliant technical report prepared by an independent qualified person.  In assessing whether a property qualifies as an advanced property, the TSX will consider a number of factors, including mineralization, commodity grades, current and forecast commodity prices, geology and size of the deposit, location and infrastructure.

The notice clarifies the TSX's position that infrastructure may be an important factor in determining whether a property qualifies as an advanced property, particularly when a property is located in a remote or isolated area that is not readily accessible by road, railway or port, and particularly with respect to commodities shipped in bulk such as coal, iron ore, base and precious metal concentrates, and industrial minerals, such as sand and gravel, limestone, commercial clay, and gypsum. The notice advises that applicants seeking a listing on the TSX that have bulk commodity properties in remote or isolated locations that are not easily accessible by existing roads, a railway or a port should have a plan to develop or obtain access to the required infrastructure together with a cost estimate, ideally outlined in a technical report supported by a preliminary economic assessment, pre-feasibility study or feasibility study.  The TSX will assess the reasonableness of the plan, taking into consideration: (i) whether infrastructure has been built over similar terrain and circumstances in the past and the cost associated with building such infrastructure; (ii) whether the infrastructure will be unconventional; and (iii) the assumptions in respect of the funding of the infrastructure, specifically whether the applicant will fund the infrastructure or rely on third parties to fund or develop the infrastructure. It is not required that an applicant have the necessary funds on hand to develop the infrastructure as a condition of listing.

Under Canadian Institute of Mining, Metallurgy and Petroleum rules, economic considerations are applied to mineral resource and particularly mineral reserve calculations.  Therefore, while a property that is located in a remote or isolated area with a mineral reserve or mineral resource will typically qualify as an advanced property, infrastructure will still remain an important aspect of that determination. A property without a mineral reserve or mineral resource may still qualify as an advanced property where infrastructure or other material considerations do not appear to impede the economic viability of the property.

Infrastructure will not be a material consideration with respect to gold, diamond and other commodities that can be produced on-site in relatively small quantities, which have a high value relative to their weight and can be transported to market by air, even if the property is located in a remote area.

2. Pricing of Stock Options Granted Prior to an Initial Public Offering

The TSX restricts grants of stock options having an exercise price lower than the market price of the underlying securities at the time the option is granted. In the context of an IPO, the TSX considers market price to be the offering price of the relevant security. The TSX has established a three month period immediately prior to the filing of a preliminary prospectus in connection with the IPO as a guideline period during which an issuer is deemed to have had knowledge of an upcoming IPO.  Therefore, the notice advises that an issuer should not price options at a discount to the IPO offering price during such three month period, otherwise the TSX will likely require such options to be cancelled, forfeited or re-priced to the IPO offering price as a condition of listing. Despite the foregoing, the TSX may consider accepting options with an exercise price that is lower than the IPO offering price provided that the issuer has recently completed a material financing of the relevant securities to arm's length parties and the exercise price of the options is not lower than the price at which such securities were sold.

3.  Financial Statements in Support of a Listing Application

Audited Forecast Financial Statements

Issuers applying to list on the TSX under the forecasting profitability category must meet certain financial tests evidenced  by a complete set of forecast financial statements covering the current or next fiscal year (on a quarterly basis), accompanied by an independent auditor's opinion that complies with the Canadian Institute of Chartered Accountants' Auditing Standards for future-oriented financial information. Sponsorship will generally be required  if the audited forecast is not published in a prospectus or other disclosure document and is not subject to the requirements of future-oriented financial information in Part 4B of National Instrument 51-102 - Continuous Disclosure Obligations. Where sponsorship is required, the sponsor must review and comment on the audited forecast and any other future-oriented financial information that has been presented with the listing application.

Pro Forma Financial Statements

The TSX may require or rely upon pro forma financial statements to assess whether an applicant, which has or will complete a significant transaction (such as an acquisition or disposition of assets) in connection with or proximate to listing, meets original listing requirements. The TSX has acknowledged that there are no generally accepted accounting standards in Canada regarding the preparation and presentation of pro forma financial statements that allow an auditor to assess the fairness of presentation of the pro forma financial statements and it is generally not feasible for an auditor to provide an audit or any other form of assurance in regards to pro forma financial statements. Accordingly, the TSX will review the adjustments contained therein, and may require additional adjustments, to ensure they reflect, in all material respects, the significant transaction.

Accounting Standards

The notice advises that in addition to financial statements prepared in accordance with International Financial Reporting Standards (IFRS), the TSX will accept financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) in the United States for SEC issuers (as defined in National Instrument 52-107 - Acceptable Accounting Principles and Auditing Standards) that are currently filing or anticipate filing such statements in Canada.  Financial statements prepared in accordance with GAAP of other jurisdictions may also be acceptable in certain circumstances. In making such determination, the TSX will take into account a variety of factors, including whether the applicant is from a "designated foreign jurisdiction" or an "SEC foreign issuer" as defined in National Instrument 71-102 - Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. The TSX encourages consultation on a pre-filing basis regarding accounting standards for the purposes of a listing application and may also require a submission from the issuer's auditors or financial advisors (including the sponsor) in support of accepting financial statements not prepared in accordance with IFRS or U.S. GAAP.

A copy of the staff notice can be obtained on the TSX's website by clicking here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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