On December 1, 2022, the Toronto Stock Exchange (TSX) published for comment certain proposed amendments (the Proposed Amendments) to Section 606 – Prospectus Offerings of the TSX Company Manual (the Manual). The Proposed Amendments aim to provide greater clarity and predictability as to when the TSX will apply private placement rules to prospectus offerings.

Background

Section 606 of the Manual sets out the rules applicable to an issuer that proposes to distribute securities by way of prospectus offering. Subsection 606(a) requires issuers to file notice of the prospectus offering with the TSX and provide certain particulars about the offering. The TSX reviews the notice to determine whether the offering is a "bona fide" public offering. Where a prospectus offering is not considered bona fide, it is reviewed under more restrictive rules applicable to private placements (the Private Placement Rules).

The Private Placement Rules include limitations on offering price discounts and require shareholder approval when an offering: (i) is completed at more than the maximum permitted discount (typically 15%) to the market price (which is based on a five-day volume-weighted average price (VWAP)); (ii) results in dilution of more than 25% where the offering price is less than the market price; and (iii) results in insiders acquiring more than 10% of the issuer's securities, when aggregated with acquisitions under prior financings completed over the past six months.

Currently, subsection 606(b) of the Manual lists five factors to consider when determining whether an offering is a bona fide public offering: (i) method of distribution; (ii) participation of insiders; (iii) number of placees; (iv) offering price; and (v) economic dilution.

Unfortunately, the Manual does not include guidance on the relative weight or thresholds applicable to each factor. This lack of clarity created additional regulatory burdens on issuers and their agents when contemplating raising capital via a prospectus offering, particularly in the context of a bought deal or overnight marketed offering where transactions may be launched on short notice and are typically priced using the closing market price of the issuer's securities.

Proposed Amendments

The Proposed Amendments will, among other things, remove the five factors set out in subsection 606(b) and replace them with a clearer, more transparent framework for determining the applicability of the Private Placement Rules. The Proposed Amendments consider:

  • whether the offering has been "Broadly Marketed" (as defined below);
  • the offering price; and
  • insider participation in the offering.

"Broadly Marketed" offerings

Under the Proposed Amendments, the TSX requires an issuer to include in its notice whether or not the offering is "Broadly Marketed" – that is, an offering in which the agent or underwriter either:

  • distributes the offered securities to at least 50 purchasers; or
  • makes the offering known to the selling group and/or equity capital markets desks at all Canadian investment dealers.

If a prospectus offering does not meet either prong of this definition, the Private Placement Rules will apply.

Offering price

Under the Proposed 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. This amendment provides for the pricing of a prospectus offering to be determined at the discretion of the issuer's board in the context of the market.

In addition, when analyzing discounts in instances where there is insider participation, instead of using a five-day VWAP for market price, the TSX will use the price per security at which the last trade was effected during the trading session immediately prior to the announcement of the offering (the Closing Price).

Insider participation

If insiders of an issuer are participating in a prospectus offering and the offering is priced at less than or equal to a 15% discount to the Closing Price, the TSX will accept the insider participation up to their respective pro rata interest in the issuer.

If the offering price exceeds a 15% discount to the Closing Price, the TSX will review all insider participation under the Private Placement Rules.

Request for Comment

The Proposed Amendments will become effective following public notice and comment, as well as approval by the Ontario Securities Commission. Comments were accepted until January 31, 2023. For more information, please see the comments received.

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.