On April 20, 2023, the Toronto Stock Exchange ("TSX") adopted amendments ("Amendments") to Section 606 – Prospectus Offerings of the TSX Company Manual ("the Manual"). Among other things, the Amendments provide greater clarity and predictability as to allowable discounts in connection with prospectus offerings and as to when the TSX will effectively look through the use of a prospectus by an issuer and apply the more restrictive private placement rules.
On the same day, the TSX issued TSX Staff Notice 2023-0002 ("Staff Notice"), which updates prior guidance (in TSX Staff Notice 2018-0003) with respect to pricing a prospectus offering or private placement where there has been recent disclosure of material information.
Background
The Amendments were originally published for comment on December 1, 2022. The eleven comment letters that were subsequently received generally supported the Amendments in view of the clarity, predictability and transparency that they provided. As adopted on April 20, 2023, the Amendments are substantially the same as those that were proposed in December.
Please refer to our post from February of this year for a summary of the TSX requirements as they applied prior to the adoption of the Amendments and of the Proposed Amendments.
The Amendments
Section 606 of the Manual sets out the rules applicable to an issuer that proposes to distribute securities by way of prospectus offering. Where a prospectus offering is not considered bona fide by the TSX, it is reviewed under more restrictive rules applicable to private placements provided for at Section 607 of the Manual (the "Private Placement Rules").
The factors that were to be considered when determining whether an offering was a bona fide prospectus offering, which were included in subsection 606(b) of the Manual prior to the Amendments, were replaced with a clearer, more transparent framework based on whether the offering has been "Broadly Marketed" (as defined below) and insider participation in the offering.
With the Amendments, if a prospectus is Broadly Marketed and there is no insider participation, the TSX will generally accept any offering price, regardless of the discount. The TSX will allow insiders to participate up to their pro rata interest at a 15% discount to market; and will apply the Private Placement Rules to insider participation beyond a 15% discount to market or beyond pro rata interest.
"Broadly Marketed" offerings
An offering is considered "Broadly Marketed" if the agent or underwriter either (i) distributes the offered securities to at least 50 purchasers; or (ii) makes the offering known to the selling group and/or equity capital markets desks at substantially all Canadian investment dealers.
If a prospectus offering does not meet either prong of this definition, the Private Placement Rules will apply, including applicable limitations relating to discounts, insider participation and maximum dilution.
Insider participation
If a prospectus is Broadly Marketed and the offering price is equal to or less than a 15% discount to the last trade effected during the trading session immediately prior to the announcement of the offering (the "Closing Price"), the TSX will accept insider participation up to their respective pro rata interest, without applying the Private Placement Rules. However, the TSX will apply the more restrictive Private Placement Rules to any portion of insider participation that exceeds their respective pro rata interest in the issuer.
If a prospectus offering is Broadly Marketed but the offering price exceeds a 15% discount to the Closing Price, the TSX will apply the Private Placement Rules to all insider participation. TSX will also apply the Private Placement Rules to all insider participation where insiders are being paid a fee which would result in net proceeds to the issuer, on a per security basis, being less than pursuant to the prospectus offering.
As noted above, when considering the discounts applied to a prospectus offering priced in the normal course, absent recent dissemination of material information, the TSX will now use the Closing Price instead of the prior five-day volume-weighted average trading price ("VWAP") pricing rule.
The Staff Notice
The Staff Notice provides updated guidance with respect to pricing a prospectus offering or private placement where there has been recent disclosure of material information.
As indicated in the Staff Notice, where a listed issuer seeks to price a financing following the dissemination of material information, the TSX will not include pre-dissemination trading in the calculation of market price. Rather, the TSX will assess the market price based on (i) the closing price of the most recently completed trading session for a prospectus offering, and (ii) the one-day VWAP for a private placement, in each case reflecting one clear trading session following the dissemination of the material information. The TSX may however use discretion to determine an alternate formula in cases where the closing price or single day VWAP, respectively, does not appear appropriate, such as where the stock does not appear sufficiently liquid.
Listed issuers remain able to price a financing concurrently with the announcement of a material development that would otherwise not occur without such concurrent financing, such as certain material acquisitions. To rely on such exception, listed issuers will still need to comply with the various requirements of TSX Staff Notice 2016-0006.
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.
