Canada: TSX Releases Guidance For Listing Applications And Pre-IPO Options

Last Updated: November 18 2013
Article by Nicole Washington

The Toronto Stock Exchange (the "TSX") has provided guidance on the following three areas:

  1. Original listing applications ("Applications") filed under the mineral exploration and development-stage category.
  2. Financial statements submitted in support of an Application.
  3. The pricing of stock options ("Options") granted prior to an initial public offering (an "IPO").

1. Applying under the Mineral Exploration and Development Stage Category

To meet listing requirements in this category, an issuer must have a sufficiently advanced property where continuity of mineralization is demonstrated in three dimensions at "economically interesting grades" (an "Advanced Property"), as detailed in a technical report to be reviewed by TSX.

TSX has provided guidance about its considerations in determining if a property is an Advanced Property when a project is located in a remote or isolated area that is not readily accessible either by road, railway or port (a "Remote Area").

The Importance of Infrastructure

For a project in a Remote Area, infrastructure is a particularly important factor to determine whether a project qualifies as an Advanced Property. Infrastructure is a key consideration for commodities shipped in bulk such as coal, iron ore, all base and precious metal concentrates, and industrial minerals, such as sand and gravel, limestone, commercial clay and gypsum (collectively, "Bulk Commodities"). Note that infrastructure is not a material consideration for commodities that can be produced on-site in relatively small quantities and have a high value relative to their weight, such as gold and diamonds. If an issuer has a Bulk Commodity project in a Remote Area, the issuer should prepare an infrastructure plan as outlined below.

Infrastructure Plan

  1. Outline the plan to develop or obtain access to the required infrastructure;
  2. Include a cost estimate;
  3. Ideally, outline the plan in a technical report, supported by a preliminary economic assessment, pre-feasibility study or feasibility study; and
  4. Ensure the plan is reasonable.

TSX will assess the reasonableness of the plan, taking into consideration: (i) past history related to infrastructure and prior costs; (ii) whether the infrastructure will be unconventional; and (iii) the assumptions in respect of the funding of the infrastructure (specifically, internal or external funding). Although cost is a factor, TSX does not require the applicant to have the funds on hand to develop the infrastructure as a condition of listing.

Where infrastructure is not addressed in the technical report, applicants are encouraged to consult with TSX to determine whether alternative supporting information may be provided to satisfy the criteria for an Advanced Property.

Mineral Reserves and Mineral Resources

Generally, a project that is in a Remote Area and that contains a "mineral reserve" or "mineral resource" will qualify as an Advanced Property. However, infrastructure will remain an important aspect of the determination. In these circumstances, the estimation of a mineral reserve must be demonstrated by at least a preliminary feasibility study that accounts for the cost of developing the required infrastructure, if the cost will be borne by the issuer. If the cost will be borne by a third party, the assumptions to support such fact should be stated.

A property with neither a mineral reserve nor a 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 project.

2. Financial Statements in Support of an Application

TSX has also provided guidance with respect to financial statements filed in support of an Application.

Accounting Standards

TSX will accept financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") or Generally Accepted Accounting Principles ("GAAP") in the United States for SEC issuers that are currently filing or anticipated to file such statements with the Canadian Securities Administrators.

Financial statements prepared in accordance with GAAP of other jurisdictions may also be acceptable. In making such determination, TSX will take into account a variety of factors, including whether the applicant is from a "designated foreign jurisdiction" or is an "SEC foreign issuer". TSX may also require submissions from the auditors and financial advisors in support of such financial statements. Such applicants are encouraged to consult with TSX on a pre-filing basis.

Audited Forecast Financial Statements

Applicants under the "forecasting profitability" category must demonstrate, among other things, that they meet certain financial tests as evidenced by providing a complete set of forecast quarterly financial statements, accompanied by an independent auditor's opinion that complies with the Canadian Institute of Chartered Accountants' Auditing Standards for future-oriented financial information (an "Audited Forecast"). TSX will require sponsorship 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 of applicable securities laws. If 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 Application.

Pro forma Financial Statements

In certain cases, Applications are supported by pro forma financial statements.  Since pro forma financial statements are not audited, TSX reviews them to evaluate whether they reflect, in all material respects, all contemplated transactions. If TSX determines that they do not, TSX  may require further adjustments to the pro forma financial statements. In the event that TSX relies on pro forma financial statements that are not publicly available in support of an Application, TSX may require the sponsor or auditor to comment or provide comfort on the adjustments.

3. Pricing of Stock Options Granted Prior to an IPO

In the context of an IPO, TSX expects that the Options granted within the three months immediately prior to filing a preliminary prospectus will be granted with an exercise price that is at or above the offering price of the applicable security. TSX believes that these three months serve as a sufficient proxy for the period during which an issuer has knowledge of an upcoming IPO and therefore should not be pricing Options below the offering price. However, TSX would consider accepting Options with an exercise price that is discounted to the offering price provided that such price is not lower than the price at which the applicable securities were recently issued to arm's length parties in a material financing.

A copy of the TSX Staff Notice to Applicants, Listed Issuers, Securities Lawyers and Participating Organizations is available 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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