The Toronto Stock Exchange (TSX) has published for comment proposed amendments (the “Proposed Amendments”) to the TSX Company Manual (the “Manual”) that clarify when the TSX will apply its private placement rules to prospectus offerings. The Proposed Amendments are open for public comment until January 31, 2023.
Background
Section 606 of the Manual sets out rules applicable to issuers proposing to distribute securities by way of a prospectus offering. Among other things, Section 606 requires issuers to provide the TSX with notice of a prospectus offering, including details of the offering. In reviewing the notice, the TSX determines whether the offering is a bona fide public offering. If a prospectus offering is not considered a bona fide public offering, the TSX will apply its more stringent private placement rules which, among other things, require shareholder approval for financings (a) completed at more than the maximum permitted discount (15% where the stock price exceeds $2.00), (b) resulting in dilution of more than 25% where the offering price is less than the “market price” (as defined by the Manual), and (c) to insiders that result in 10% dilution, when aggregated with prior insider financings completed over the past six months.
The Manual currently sets out the factors the TSX considers in determining whether a prospectus offering is a bona fide public offering, but does not provide details of how each factor ultimately affects the final determination. The Proposed Amendments intend to address that deficiency.
Proposed Amendments
The TSX will now consider three factors when considering whether a prospectus offering is bona fide: (a) whether the offering has been broadly marketed; (b) the offering price; and (c) insider participation.
Broadly Marketed
The Manual currently provides that a bona fide prospectus offering must be “broadly distributed” to at least 50 purchasers. The Proposed Amendments replace the concept of “broadly distributed” with “broadly marketed”, which 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 markets desks at all Canadian investment dealers. The Proposed Amendments do not provide clarity on the meaning of “all Canadian investment dealers”.
Offering Price
The Manual currently lists “offering price” as a factor in determining whether a prospectus offering is bona fide, but does not state the acceptable level of discount. Historically, the TSX has taken the position that a discount of up to 10% was acceptable for a bona fide prospectus offering. The TSX acknowledged this may no longer be appropriate in the current financing market, and that more deference should be given to an issuer’s board of directors when pricing an arm’s length financing. Accordingly, under the Proposed Amendments, if a prospectus offering is broadly marketed and there is no insider participation, the TSX will accept the offering price, regardless of the discount.
The Proposed Amendments also establish that the new relevant reference price when calculating a discount is the closing price of the most recently completed trading session, rather than the five-day volume weighted average trading price.
Insider Participation
Lastly, the Proposed Amendments state that, when insiders participate in a prospectus offering, the TSX will review the offering depending on the size of the discount offered and level of insider participation. If the offering is broadly marketed and priced within a 15% discount, insiders are able to participate up to their pro rata interest. Any insider participation beyond pro rata will be subject to the TSX’s private placement rules. If the offering discount is greater than 15%, the TSX will apply its private placement rules to all insider participation.
Looking Forward
We believe the Proposed Amendments bring additional clarity to capital markets participants and should make the capital raising process (in particular bought deals and overnight marketed offerings) more efficient by reducing the need for pre-launch discussions with the TSX.
If you would like to discuss the Proposed Amendments or for any further information, please contact any member of our Capital Markets Group.