Approval rights of the Toronto Stock Exchange (the "TSX") have always been part of the process of listing securities to be issued in the context of prospectus offerings. For a vast majority of issuers, this has been a simple formality, nothing more than a box to check. For other issuers, in particular those wanting to complete a public offering at a price involving a significant discount to market price (i.e. more than 10%) or involving important insider participation, the discretion of the TSX in granting such approval has resulted in uncertainty and, in certain cases, a meaningful obstacle to financings.
The problem that those issuers faced is that the TSX uses discretionary and unwritten criteria to decide whether the public offering should nevertheless be subject to the TSX rules on private placements which, in particular, limit the maximum amount of dilution without prior shareholder approval. This lack of clarity has been exacerbated by the fact that the vast majority of prospectus offerings in Canada are now executed by way of "bought deals" or overnight marketed deals, which both require swift execution and pricing, and thus, certainty on applicable rules.
Advocating that greater clarity and certainty will reduce the burden placed on issuers from having to "pre-clear" transactions and the potential for restrictions on access to capital in a timely manner, the TSX is proposing a new set of rules for determining if a prospectus offering is considered a "bona fide" public offering and not subject to the TSX's private placement rules. The proposals are also consistent with the TSX's view that deference should be given to the board of directors of issuers in fixing the issuance price for an offering.
With its proposed amendments to Section 606 of the Company Manual, the TSX is scrapping its old list of broad factors considered in its decision-making process and the related unwritten criteria used for this purpose. Instead, the TSX's proposal sets out when it will consider a prospectus offering to be a "bona fide" offering and when, on the contrary, it will apply the private placement rules to a prospectus distribution, including the rules as to the maximum dilution and discount to share price that will be permitted without prior shareholder approval.
Proposed Amendments in Short...
A prospectus offering will be considered a "bona fide" public offering if it is "broadly marketed", i.e. distributed to at least 50 purchasers or made known to the selling group of underwriters or agents, or the equity capital market desks at all Canadian investment dealers. If insiders participate in the offering (up to their pro rata interest), the offering price will need to be at a discount to the last closing price of not more than 15%.
Below is a table summarizing the changes proposed concerning marketing and pricing of the offering and insider participation:
| KEY CHANGES | ||
| Current Approach | Proposed Changes | |
| Broadly Marketed | A prospectus offering is generally considered to be "broadly distributed" where there are 50 or more subscribers. | "Broadly marketed" is defined as an offering where the agent or underwriter either: (i) distributes the offered securities to at least 50 purchasers; or (ii) makes the offer known to the selling group and/or equity capital market desks at all Canadian investment dealers. |
| Offering Price |
No specific maximum discount is provided in the manual, but the TSX generally imposed a maximum 10% discount subject, in certain circumstances, up to a 15% discount. From 2014 to 2020, approximately 85% of prospectus offerings were completed within a 15% discount to market price, with the assent of the TSX. The 15% discount coincides with the lowest permitted discount available to issuers for private placements under the private placement rules. The reference point to calculate discounts is the market price which corresponds to the five day volume weighted average trading price of the securities. |
The 15% threshold becomes the official reference. For example, if the offering broadly marketed and insiders participate in the offering up to their pro rata interest, the discount cannot be higher than 15%. However, if the offering is broadly marketed and there is no insider participation, the TSX will accept the offering price regardless of the discount. The TSX is proposing to calculate discounts based on the closing price of the most recently completed trading session of the issuer's listed securities. |
| Insider Participation | Insider participation is one of the five factors considered by the TSX. |
The TSX will allow insiders to participate up to their pro rata interest where the price of the securities is within a 15% discount. If the offering is "broadly marketed" and priced at or at less than a 15% discount, the TSX will accept insider participation to maintain their pro rata interest in the issuer. Any insider participation beyond pro rata levels will be reviewed under the TSX's private placement rules. If the offering is priced in excess of a 15% discount and there is insider participation, the TSX will apply the private placement rules (which may require shareholder approval of the offering). |
The proposed changes were published by the TSX for comments before January 31, 2023. Fasken lawyers have submitted a comment letter to the TSX, which can be downloaded a comment letter to the TSX (PDF, 209 KB). Our letter was generally supportive of the proposed changes, but also contained certain recommendations that would procure greater clarity and flexibility for issuers, including the following:
- With respect to the concept of "broadly marketed" and the test involving the distribution of the offered securities to at least 50 purchasers, and having in mind the challenges facing some smaller-cap/mid-cap issuers, we recommended that the TSX consider adopting an additional test whereby the agent or the underwriter has marketed the offered securities to at least a 50 "bona fide" investors, but has only distributed the offered securities to a lesser number of purchasers. We also recommended clarifying that insiders should be excluded from the required minimum number of investors.
- With respect to the concept of "broadly marketed" and the test involving making the offering known to the selling group and/or equity capital markets desks at all Canadian investment dealers, we recommended that the requirement focus on the agent or underwriter for an offering making a "bona fide" attempt to notify the selling group or equity capital markets desks at other Canadian investment dealers in the provinces and territories where the prospectus for an offering is filed, using one or more then customary inter-dealer methods of communication of the offering.
- With respect to the offering price, we recommended that the TSX consider allowing some level of minimal insider participation in a prospectus offering (e.g., up to 5% of the offering, or such other percentage as the TSX deems appropriate) while still allowing for the board of directors of the issuer to determine the offering price and applicable discount, provided that the offering is broadly marketed.
- With respect to using the closing price as opposed to the volume weighted average market price of the securities as a reference point, we recommended that the TSX adopt an approach whereby an issuer would have the flexibility to determine whether to base the discount off of the volume weighted market price or the last closing price, based on the TSX's view that deference should be given to the board of directors of issuers in fixing the issuance price for an offering.
We look forward to the TSX's finalized amendments to Section 606 and to commenting further upon their release. In the interim, we would be pleased to discuss any questions you might have regarding either the TSX's proposed changes or our associated recommendations.
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.
