On December 1, 2022, the Toronto Stock Exchange (the “TSX“) sought out comments from the public for its proposed amendments to Section 606 — Prospectus Offerings (the “Proposed Amendments“) of the TSX Company Manual (the “Manual“). The Proposed Amendments seek to reduce the burdens that issuers and their agents face when raising capital by way of a prospectus offering by providing clarity, predictability, and greater transparency of TSX policies. The TSX expects the Proposed Amendments to come into force during the first quarter of 2023, following public notice and approval by the Ontario Securities Commission. The TSX is soliciting comments from the public on the Proposed Amendments until January 31, 2023.
Section 606 of the Manual sets out rules for issuers who intend to distribute securities by way of a prospectus offering. Pursuant to subsection 602(a) of the Manual, listed issuers are to provide notice of the proposed transaction to the TSX, which then reviews the notice and determines whether the prospectus offering is a bona fide public offering. If deemed bona fide, the terms of the offering will be accepted, subject to the applicable provisions of Section 606 of the Manual. In instances where the TSX determines that the offering is not bona fide, the TSX will advise the issuer that the prospectus offering will be reviewed under Section 607 – Private Placements of the Manual (the “Private Placement Rules“) and that additional rules will be applied to the transacti on (e.g., discount and dilution restrictions).
In considering whether a prospectus offering is bona fide, the TSX uses the following factors set out in subsection 606(b) of the Manual:
- Method of distribution;
- Participation of insiders;
- Number of placees;
- Offering price; and
- Economic dilution.
The current drafting of the Manual does not contain details as to how each factor is applied in the TSX’s determination of whether a prospectus offering is bona fide. Following the consideration of these factors, the TSX may still apply the provisions of the Private Placement Rules.
III. The Proposed Amendments
After a review of deal pricing data from 2014 to 2022, and several consultations with various market participants to obtain feedback on what constitutes a bona fide public offering, the TSX concluded that setting clearer standards is necessary. The TSX identified the following three factors in considering whether a prospectus offering is bona fide: (1) whether the offering has been broadly marketed, (2) the offering price, and (3) insider participation.
(1) Broadly Marketed
To be considered bona fide, a public offering must be broadly marketed. Under the Proposed Amendments, the TSX proposes to define “broadly marketed” as an offering where the agent or underwriter either:
- distributes the offered securities to at least 50 purchasers; or
- makes the offer known to the selling group and/or equity capital markets desks at all Canadian investment dealers.
Notwithstanding the lack of clarity on the meaning of “all Canadian investment dealers”, a prospectus offering that does not meet these criteria will be reviewed under the Private Placement Rules.
(2) Offering Price
The TSX has taken the view that when determining the price of securities distributed under a prospectus, deference should be given to an issuer’s board of directors in fulfilling their fiduciary responsibilities. As such, the Proposed Amendments provide that the TSX will generally accept the offering price of the securities offered by way of prospectus, regardless of the discount amount, provided that the prospectus offering is broadly marketed and that there is no insider participation.
Additionally, with respect to calculating the discounts for prospectus offerings and private placements, the Proposed Amendments seek to change the relevant reference price to the “closing price”1 of the most recently completed trading session of the issuer’s listed securities. This marks a shift away from the use of market price2, and is in line with the TSX’s policy view that market price is no longer most appropriate for this purpose.
(3) Insider Participation
Under the Proposed Amendments, if insiders of an issuer intend to participate in a prospectus offering, the TSX will review the offering as follows:
- If the offering is broadly marketed and is priced at less than, or equal to, a 15% discount to the closing price of the offered securities, the TSX will accept insider participation in the offering provided that insiders participate for no more than their pro rata interest. Insider participation beyond their pro rata interest will be reviewed under the Private Placement Rules.
- If the offering price exceeds a 15% discount to the closing price of the offered securities, the TSX will review all insider participation in the offering under the Private Placement Rules. This may require shareholder approval of the offering.3
- For example, if an issuer’s listed securities had a Closing Price of $1.00 and the proposed offering price was $0.80 (representing a discount of 20%), all insider participation would be reviewed under the Private Placement Rules (See Subsection 607(e) of the Manual).
The Proposed Amendments are welcomed changes for TSX issuers. These changes should increase capital raising efficiency (e.g. bought deals and overnight marketed offerings) and reduce the burden of pre-announcement pricing pre-clearance with the TSX.
If you would like to discuss the Proposed Amendments or for any further information, please contact any member of our Securities and Capital Markets Group.
1 As defined in Appendix F – Take-Over Bids and Issuer Bids Through the Facilities of Toronto Stock Exchange.
2 Defined as the five-day volume weighted average trading price.
3 Under subsection 604(a)(ii) of the Manual, the TSX will generally require shareholder approval if, in the opinion of the TSX, the offering results in more than 10% of the issued and outstanding shares of an issuer (on a non-diluted basis) being issued to insiders in a six-month period.