Equity capital markets in Canada: regulatory overview
A Q&A guide to equity capital markets law in Canada.
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity capital markets country Q&A tool.
This Q&A is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.
Main equity markets/exchanges
Main equity markets/exchanges
There are two main stock exchanges in Canada:
Toronto Stock Exchange (TSX). The TSX generally hosts listings for more senior companies with established market history (1,487 listed issuers as at 31 December 2015).
TSX Venture Exchange (TSXV). The TSXV generally hosts listings for companies that are at an earlier stage of development than a typical TSX listed issuer (1,741 listed issuers as at 31 December 2015). Approximately 20% of TSX-listed issuers as at 31 December 2015 were initially listed on the TSXV, having moved up to the TSX through the streamlined graduation process between the two exchanges.
An issuer listed on a Canadian stock exchange is subject to increased regulatory and disclosure requirements under Canadian securities laws and the rules and policies of the exchange on which it is listed of both routine and unusual events and decisions affecting its shareholders.
There were 245 international issuers listed on the TSX and TSXV as at 31 December 2015 (US 51%; Australia, New Zealand, Papua New Guinea 9%; Asia 15%; UK, Europe 9%; Africa 3%; Latin America 7%; other 6%).
The website for both the TSX and TSXV is located at www.tmx.com.
In recent years, the Canadian Securities Exchange (CSE) has become an alternative option for emerging issuers in Canada (293 listed issuers, as at 31 December 2015). Most issuers listed on the CSE have a small market capitalisation. The CSE generally has lower costs and less onerous listing, compliance and filing requirements than the TSX or the TSXV.
The CSE and other more recently recognised stock exchanges in Canada are not discussed in detail in this article. Canada also has a number of equity alternative trading systems, including Chi-X Canada, MATCH Now, Omega ATS and TMX Select, which are also not discussed in detail in this article.
Market activity and deals
From 1 January 2015 to 31 December 2015, 107 new issuers listed on the TSX, while 87 new issuers listed on the TSXV, including a combined 17 new listings by foreign issuers.
During this same period, there were a total of 1,856 financings of TSX or TSXV-listed issuers for combined gross proceeds of approximately CAD57.7 billion. The average size of a TSXV listed issuer financing during this period was CAD2.6 million while TSX issuers raised an average of CAD94.2 million per financing.
The quoted market value of all TSX and TSXV-listed companies as at 31 December 2015 was approximately CAD2.3 trillion. Approximately 114.7 billion shares traded on the TSX and TSXV, collectively, during the year ending 31 December 2015, representing a traded value of approximately CAD1.3 trillion.
Canada has a federal system of government, with power divided between the federal government and Canada's provinces/territories. Each of the provinces and territories has its own securities legislation, implemented by securities regulators (collectively, the Canadian Securities Administrators (CSA)). The rules in many areas have been harmonised and co-operative systems established between the regulators. Most significantly, the Canadian federal government and several provincial governments, including Ontario and British Columbia, have taken steps to implement a single securities regulator, the Co-operative Capital Markets Regulatory System (CCMR). The CCMR has released and received comments on consultation drafts of the uniform provincial capital markets legislation and complementary federal legislation proposed for enactment. The participating jurisdictions have targeted autumn 2016 as the implementation date for the CCMR.
Securities legislation also establishes the disclosure standards for foreign and domestic entities that become reporting issuers in Canada (that is, public companies).
The Investment Industry Regulatory Organization of Canada (IIROC) (www.iiroc.ca) is a national self-regulatory organisation responsible for overseeing and regulating investment dealers and enforcing market integrity rules relating to trading activity on Canadian securities exchanges.
The TSX and TSXV also have policies applicable to entities listed, or seeking a listing, on either exchange.
An issuer seeking a listing on either the TSX or TSXV must complete a listing application form and provide supporting data, showing the issuer's fulfilment of the respective stock exchange's minimum listing requirements. The TSX's and TSXV's listing requirements are sector and development-stage specific.
There are two levels of financial standards recognised by the TSX:
Issuers that are established with strong balance sheets and that meet prescribed levels of prior year pre-tax profitability and cash flow, known as exempt issuers.
Issuers that are smaller with lower levels of net tangible assets, cash flow or profit, known as non-exempt issuers. Non-exempt issuers are subject to closer oversight by the TSX. It is mandatory for such an issuer to evidence sponsorship of its listing application by a participating organisation of the TSX.
The TSXV also recognises two levels of financial standards:
Tier 1, which is reserved for issuers that are more advanced and have more significant financial resources.
Tier 2, which is reserved for earlier stage companies with less significant financial resources.
Generally, an issuer must show successful operation of its business and management experience and expertise in order to be listed on a Canadian stock exchange. The stock exchanges must be satisfied that an issuer has sufficient management expertise in order to determine its acceptability for listing. A personal information form and consent for disclosure of criminal record information form (collectively, a PIF) must be completed by each director, officer, promoter and other insider of the issuer. The TSX or TSXV, as applicable, will conduct a background check of each director, officer, promoter and insider based on the information provided in the PIF.
Both the TSX and TSXV can impose share escrow requirements for management and key principals of an issuer, to encourage continued interest and involvement by those persons in the issuer.
While there are few additional management or financial requirements for international issuers seeking to list in Canada (subject to the discussion below regarding emerging market issuers), as a practical matter, international issuers must be able to show their ability to satisfy their ongoing reporting and general public company obligations in Canada. Further, it is generally recommended that international issuers have some presence in Canada with respect to performing administrative, regulatory reporting and investor relations functions. This can be satisfied by having a member of the board of directors or management, an employee or a consultant of the issuer situated in Canada.
Issuers from outside of Canada, the United States, Western Europe, Australia and New Zealand are considered by the TSX and the TSXV to be "emerging market issuers". Emerging market issuers are subject to additional listing requirements and procedures. These additional requirements are designed to ensure satisfactory listing standards and consistent governance and disclosure standards for all issuers in light of what may be unique business practices, laws or regulatory requirements in the particular jurisdiction.
Minimum size requirements
The minimum size requirement for issuers varies based on the exchange to which an issuer is applying for listing and the category of issuer applying (that is, industrial, technology, oil and gas, mining, and so on).
Trading record and accounts
Neither exchange specifies requirements for a trading history, although both exchanges do require an acceptable capital structure and therefore will, as part of the listing application, review prior issuances of securities (including the rights granted to the holders of such securities).
Minimum shares in public hands
Both exchanges require that a minimum number of shares be held by public shareholders. The TSX requirement is consistent across all listing categories, whereas the TSXV requirement varies between Tier 1 and Tier 2 issuers.
An issuer already listed on another stock exchange can list directly on the TSX or TSXV if they can meet the listing standards (see Question 3).
There are no unique management or financial requirements for international issuers. However, these issuers are generally required to have some presence in Canada and must be able to show, as with all issuers, that they are able to satisfy their reporting and public company obligations in Canada (see Question 3, Main requirements, with respect to emerging market issuers).
International issuers may be eligible for certain exemptions from regulatory and reporting requirements if they are listed on a stock exchange recognised by the TSX, and if that stock exchange has similar listing requirements as the TSX or TSXV. Recognised exchanges include:
New York Stock Exchange.
London Stock Exchange Main Board.
Australian Securities Exchange.
Hong Kong Stock Exchange Main Board.
Once listed, the TSX will not apply certain of its ongoing listing standards to issuers listed on another recognised exchange, if at least 75% of the trading value and volume occurs on the other exchange in the prior 12-month period.
Minimum size requirements
Trading record and accounts
Minimum shares in public hands
There are four primary methods of going public in Canada:
Initial public offering (IPO) and listing of securities on the TSX or TSXV.
Reverse takeover (RTO) of an existing exchange-listed issuer.
Qualifying transaction with a capital pool company (CPC) listed on the TSXV, or a qualifying acquisition with a special purpose acquisition corporation (SPAC) listed on the TSX.
Direct listing on the TSX or TSXV.
IPOs are particularly beneficial for larger issuers, as the relatively fixed cost of filing a prospectus can be justified by the funds raised from the public. An IPO may also result in an issuer's securities being distributed to a wider, more diverse investor base, which can in turn create more publicity and awareness of a company's products and services, particularly if the issuer does not already have a significant presence in Canada.
Another way to go public is through an RTO of an issuer already listed on the TSX or TSXV. A publicly-listed issuer acquires a private issuer (or the private issuer's assets are sold to the listed issuer, or the two issuers merge according to an amalgamation or arrangement) and the shareholders of the private issuer become majority shareholders in the publicly-listed issuer.
In some cases, RTOs are subject to shareholder approval of the publicly-listed company, which is frequently referred to as a shell company because its business has often deteriorated and has few assets other than its listing. To obtain shareholder approval, the publicly-listed shell company must prepare a management information circular and proxy materials, and hold a shareholder meeting, or, where permitted by the exchange, obtain written consents of a majority of its shareholders. The circular must contain prospectus-level disclosure relating to the public shell company, the private issuer and the resulting issuer following the RTO.
One advantage of an RTO is that the publicly-listed shell company already has a shareholder base that can assist with satisfying the exchange's public float and distribution requirements, and also with potential future liquidity issues.
Although an RTO is generally thought to be a faster method of going public and to result in lower professional fees, the total costs and time associated with it are usually similar to a traditional IPO. In pursuing an RTO, each of the publicly-listed shell companies and the private target company will have to spend additional time and resources conducting due diligence, negotiating agreements and closing the transaction.
Typically, an RTO will also involve a concurrent public or private financing.
CPC qualifying transaction/SPAC qualifying acquisition
The qualifying transaction is a unique listing method only available for the TSXV, which has a special category of listed issuers called capital pool companies (CPC). CPCs are essentially shell companies incorporated and listed on the TSXV for the sole purpose of completing a qualifying transaction. In many cases, the qualifying transaction results in an RTO.
As shell companies, CPCs are limited in the amount of funds (CAD5 million) they can raise to list on the TSXV. CPCs can generally only use the funds raised to seek and complete a qualifying transaction, which must be completed within two years of completing listing on the TSXV (subject to certain grace periods and applicable extensions).
A qualifying transaction has the same advantages and disadvantages as a conventional RTO. However, a qualifying transaction has the added advantage that almost no due diligence is required on the CPC, since it is a special purpose vehicle with virtually no historical obligations or liabilities.
Listed on the TSX, SPACs, like CPCs listed on the TSXV, provide for a two-step process for going public. After raising a minimum of CAD30 million, a SPAC is first listed on the TSX as a non-operating cash entity and then must complete a qualifying acquisition of an operating company or assets within 36 months.
A company which meets the applicable minimum listing requirements can apply to list directly on the TSX or TSXV. If the issuer is already listed on a reputable stock exchange, it may be eligible for certain exemptions from the TSX's or TSXV's listing, regulatory and ongoing reporting requirements (see Question 4).
A direct listing provides an issuer with additional liquidity, through an additional market for trading its securities and access to the Canadian capital markets. The primary disadvantage of a direct listing is that if it is not accompanied by a concurrent financing in Canada, there may be little or no trading activity, and the expenses incurred in pursuing and maintaining the Canadian listing may not justify the minimal amount of trading activity.
On 8 December 2015 the Canadian rights offering regime was significantly improved by the Canadian Securities Administrators (CSA), providing companies with more efficient access to capital through rights offerings than had previously been possible.
The principal benefits of issuing equity by way of a rights offering are:
All shareholders are provided with an equal opportunity to participate.
The expenses of a rights offering can be lower than for alternative methods of equity financing.
Rights offerings can generally be completed in a shorter time period than a special warrant issue.
A rights offering can be done through a prospectus (see Question 10) or a prospectus exemption (see Question 11). In the case of a prospectus exemption, the offering is effected through a rights circular, which involves less onerous disclosure and filing requirements than a prospectus. To rely on the prospectus exemption and issue rights through a rights circular, the rights offering must not increase the number of outstanding securities of the class being issued or, in the case of debt, the principal amount of such debt, by more than 100%, assuming all rights issued are exercised.
From a cost perspective, a rights circular is significantly less expensive than a prospectus, but may be more expensive than simply doing a private placement based on other commonly used prospectus exemptions. Because a rights offering is open to all existing shareholders including those residing in Québec, a French translation of the offering document is required, regardless of whether the rights offering proceeds by way of a circular or a prospectus.
A prospectus exempt rights offering must be open for at least 21 calendar days and a maximum of 90 calendar days after the rights circular is sent to shareholders. If the rights offering proceeds by way of a prospectus, an issuer should expect at least two months from when a draft preliminary short form prospectus is submitted for initial review to closing of the offering.
Procedure for a primary listing
For a TSX listing, an issuer must complete a listing application form and provide the applicable supporting data to show that it is able to meet the minimum listing requirements (see Question 3). Additionally, the issuer must sign a listing agreement evidencing its commitment to comply with the TSX requirements for the continuance of its listing.
On completion of the assessment, the TSX will do one of three things:
Grant conditional approval.
Defer the listing application, pending resolution of specified issues.
Decline the listing application, in which case the issuer must wait six months before reconsideration.
The TSXV has a similar listing application process. In addition, the TSXV often requires evidence of value (that is, net tangible assets, concurrent financing, and so on), a business plan and other documentation to be submitted as part of the listing application for a listing by way of an RTO or qualifying transaction. Following completion of the initial review, the TSXV will either:
Grant conditional acceptance.
Defer the decision on the application.
Decline the application for listing.
Procedure for a foreign company
The procedure for a foreign company seeking to list shares on the TSX or TSXV is generally the same as the process for a domestic Canadian issuer, although emerging market issuers are subject to certain additional requirements (see Question 3). Depository receipts are not commonly used in Canada.
Advisers: equity offering
The main documents produced in an equity offering include, as applicable, the:
Offering document (prospectus, offering memorandum or rights offering circular).
Underwriting or agency agreement (see Question 17).
Subscription agreement (for a private placement).
Any road show or other marketing materials.
These are generally the same types of documents produced for an IPO (other than a subscription agreement, which would not be used), although their contents will generally be more expansive (see Question 12). For an IPO, further documentation is typically also required, including:
An agreement with the issuer's registrar and transfer agent.
Public company governance documents and compensation plans.
Lock-up agreements for insiders restricting post-IPO trading.
Underwriters act as gatekeepers to the Canadian capital markets. In connection with a prospectus offering, the investment dealers discharge their gatekeeper role by:
Completing a due diligence investigation of the issuer, its management and board of directors.
Participating in the preparation of a prospectus.
Certifying that, to the best of their knowledge, information and belief, the prospectus constitutes full, true and plain disclosure of all material facts relating to the offered securities.
An issuer's external auditors provide an independent assessment of whether the information presented in the issuer's annual financial statements has been fairly presented. The auditors:
Audit and review the historical financial statements required in a prospectus.
Prepare letters to the investment dealers providing comfort with respect to financial data contained in the prospectus.
Participate in conference calls or meetings regarding the investment dealers' due diligence investigation.
Provide "expert" consents to the applicable securities commissions concerning their audit report.
External legal counsel to the issuer:
Assists in the drafting of the prospectus.
Reviews and advises on other documents (including the underwriting agreement and lock-up agreements).
Analyses and makes recommendations on transaction structuring.
Assists the issuer with the due diligence process undertaken by the underwriters, their legal counsel and other experts.
Maintains a dialogue with regulators and stock exchanges with respect to clearing the prospectus and listing the issuer's securities.
Provides an expert consent to the applicable securities commissions concerning any legal opinion provided by such counsel in the prospectus.
Co-ordinates closing of the offering.
External legal counsel to the investment dealers works with external legal counsel to the issuer on many of the same tasks noted above, taking a primary role in assisting the investment dealers with due diligence and drafting of the underwriting agreement and lock-up agreements.
Unlike US law firms, Canadian law firms do not customarily provide 10b-5 negative assurance letters (that is, a no misrepresentation opinion) to support the investment dealers due diligence defence in Canadian offerings unless there is a US investment dealer (or its Canadian affiliate) involved in the offering.
To the extent that other portions of the prospectus reflect a report, valuation, statement or opinion of an expert, the consent of the expert to the securities commissions is also generally required.
Equity prospectus/main offering document
Any "trade" in Canada of securities of an issuer that have not been previously issued is considered a "distribution" under Canadian securities laws, and can only be made through a prospectus or an exemption from the prospectus requirements (private placement).
Similarly, any "trade" in Canada of previously issued securities of an issuer from the holdings of any "control person" (generally, a person, company or combination of persons or companies holding a sufficient number of any securities of that issuer to materially affect the control of that issuer) is also a distribution, and also can only be made through a prospectus or exempt private placement.
Securities laws in Canada broadly define a "trade" to include, among other things:
Any sale or disposition of a security for valuable consideration.
Any receipt by an investment dealer of an order to buy or sell a security.
Any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the above.
As a first step, a preliminary prospectus is filed in all of the provinces and territories of Canada in which the securities of the issuer will be offered to the public. If more than one province or territory is involved, the issuer must designate one principal regulator (generally, the regulator of the jurisdiction in which the issuer's head office is located, or the jurisdiction with which the issuer has the most significant connection) to review the prospectus (Principal Regulator) and provide comments and questions to the issuer (Comment Letter). If the prospectus is filed in Ontario and the Principal Regulator is not the Ontario Securities Commission (OSC), the Principal Regulator and the OSC will undertake a co-ordinated review and comment process.
The investment dealers participating in the prospectus offering must send a copy of the preliminary prospectus to each prospective buyer who indicates an interest in buying the offered securities.
When all matters raised in the initial and any subsequent Comment Letters have been addressed to the satisfaction of the Principal Regulator (and the OSC, if applicable), a copy of the final prospectus is filed with the securities commission in each Canadian province and territory where the securities are to be sold, and delivered to each investor under the offering. Following the expiry of a short statutory rescission period, the offering can then be completed.
Securities offered in reliance on an exemption from the prospectus requirements cannot be sold to the general public and can only be resold in reliance upon an exemption from the prospectus requirements or, in certain cases, following a restricted or "seasoning" period (commonly known as a hold period).
Available exemptions from the prospectus requirements include:
Accredited investor. The most commonly used exemption. It generally permits the sale of securities to persons and companies generally considered to be sophisticated investors, such as financial institutions, pension funds, certain mutual funds and high income or net worth individuals.
Minimum amount investment. Generally permits the sale of securities to an investor who is not an individual and who purchases, as principal, the prescribed minimum amount of CAD150,000 of securities.
Private issuer. Generally permits the sale of securities by an issuer whose securities are subject to transfer restrictions and are beneficially owned by no more than 50 people (not including employees of the issuer and its affiliates).
Employees, executive officers, directors and consultants. Generally permits the sale of securities to employees, executive officers, directors and consultants of an issuer, if participation in the distribution by such person is voluntary.
Family, friends and business associates/founder and control person. Generally permits the sale of securities to family, friends, business associates, a founder of the issuer, or a control person.
There is no requirement to deliver an offering memorandum to buyers in connection with sales made according to the above listed prospectus exemptions in Canada.
Long form prospectus
Non-financial statement disclosure. The basic form of prospectus for an issuer first accessing the Canadian capital markets is referred to as a long form prospectus.
The form and substance requirements for a long form prospectus are specified in National Instrument 41-101 - General Prospectus Requirements and Form 41-101F1, and include the items specified under "Prospectus content requirements" near the end of this document.
Issuers in certain industries are subject to additional disclosure requirements, see:
National Instrument 43-101 - Standards of Disclosure for Mineral Projects (NI 43-101).
National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (NI 51-101).
All prospectuses in Canada must be certified to the effect that the prospectus contains full, true and plain disclosure of all material facts relating to the securities being offered. This certification must be made by:
The chief executive officer, the chief financial officer and any two directors of the issuer (on behalf of all the directors).
The investment dealers of the proposed offering (although their certification is knowledge qualified).
A material fact for this purpose is a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.
Financial statement disclosure. A long form prospectus generally must include, for each of the three most recently completed financial years ended more than 90 days before the date of the prospectus, audited consolidated:
Statements of comprehensive income.
Statements of changes in equity.
Statements of cash flow.
A long form prospectus must also include statements of financial position as at the end of the two most recently completed financial years, each ended more than 90 days before the date of the prospectus.
If the issuer has not completed three financial years, these requirements apply only to the years completed.
If the offering takes place more than a fixed period after the end of the prior year, the prospectus must also contain, for the most recently completed quarterly interim period and the corresponding period in the immediately preceding financial year, an unaudited comparative:
Statement of comprehensive income.
Statement of changes in equity.
Statement of cash flow
The prospectus must also contain a statement of financial position as at the last day of the interim period.
All interim financial statements must be reviewed by an auditor.
Management's discussion and analysis (MD&A) must accompany each annual and interim financial statement (see Question 21).
Financial statements must also be provided in respect of certain completed significant acquisitions and probable future acquisitions. In certain circumstances, the issuer must also provide pro forma financial statements giving effect to the completed or proposed acquisition.
National Instrument 52-107 - Acceptable Accounting Principles, Auditing Standards and Reporting Currency requires all issuers (other than certain designated foreign issuers and US issuers) to prepare financial statements in accordance with the International Financial Reporting Standards (IFRS) for publicly accountable enterprises, and audited in accordance with Canadian generally accepted auditing standards. The auditor undertaking the audit must have entered into a participation agreement with the Canadian Public Accountability Board.
Short form prospectus
Once a company becomes a reporting issuer in Canada, it may be able to qualify securities for offering in Canada according to a short form prospectus under National Instrument 44-101 - Short Form Prospectus Distributions (NI 44-101). A short form prospectus incorporates by reference portions of the issuer's continuous disclosure filings, including the issuer's:
Annual information form.
Most recent annual financial statements and interim financial reports (along with corresponding MD&A).
Management information circular.
Business acquisition reports.
Material change reports.
Under National Instrument 44-102 - Shelf Distributions, the Canadian Securities Administrators (CSA) permits eligible reporting issuers to qualify for distribution a specified quantum of securities (debt and/or equity) for a 25-month period, using a shelf prospectus.
In a shelf prospectus, which follows the form of a short form prospectus, the issuer is permitted to leave silent specific details of the securities to be offered and the means of distribution. When a specific offering is contemplated, a shelf supplement is used to complete disclosure of the terms of the offering and effect a sale of securities.
If an issuer offers securities under a prospectus in the Province of Québec, the prospectus and any documents incorporated by reference must be translated into French.
The issuer, the investment dealers, the issuer's auditors and the issuer's and investment dealers' legal counsel work together in drafting the prospectus.
A final prospectus is a liability document under securities laws, as investors are granted statutory rights to sue for rescission of the purchase or damages if there is a misrepresentation in the prospectus. Subject to a number of qualifications and defences, the following persons are jointly and severally liable under these provisions:
The issuer and its directors.
Any persons signing the prospectus.
Any securityholders selling under the prospectus.
The investment dealers.
Any experts named in the prospectus (to the extent the misrepresentation is contained in the expert's report or opinion disclosed in the prospectus).
Only the investment dealers have a due diligence defence, which provides a strong incentive for investment dealers to conduct thorough investigations regarding the operations and business of the issuer, and to require full disclosure of all material facts in the prospectus. By doing so, the investment dealers can rely on those procedures to show that they took reasonable steps to ensure that the prospectus does not contain a misrepresentation.
Investment dealers' counsel also typically host a formal and detailed due diligence session with the issuer's management, auditors and counsel immediately before filing a preliminary prospectus, followed by a brief bring-down oral due diligence session immediately before the final prospectus is filed and a final due diligence session prior to closing of the offering.
Defences for the other parties noted above, including issuers, are limited.
Marketing equity offerings
Canadian securities laws permit certain limited marketing-related activities to occur before the receipt has been issued for the final prospectus by the applicable Securities Commission, but only after the receipt has been obtained for a preliminary prospectus (waiting period).
Specifically, the only written information issuers and investment dealers can disseminate to potential investors during the waiting period is:
The preliminary prospectus.
A skeletal "prospectus notice" (identifying the securities, their price and a contact from whom they will be available for purchase).
"Standard term sheets" and (more detailed) "marketing materials", each of which is required to have prescribed disclosures, and include road show presentations, which are also subject to regulatory requirements.
Where an issuer has entered into a bought deal letter with respect to securities to be issued under a short form prospectus, marketing activities can occur prior to commencement of the waiting period, subject to satisfying certain conditions.
The rules of the Investment Industry Regulatory Organization of Canada, the body which governs investment dealers, provide that, subject to certain limited exceptions, no such dealer can issue a research report for an equity or equity-related security regarding an issuer for which the dealer acted as manager or co-manager of either:
An IPO of equity or equity related securities, for ten calendar days following the date of the offering.
A secondary (post-IPO) offering of equity or equity-related securities, for three calendar days following the date of the offering.
Despite any available exceptions, guidance provided by the Canadian Securities Administrators provides that an investment dealer involved with a potential prospectus offering should not issue a research report or provide media commentary on the issuer before filing of the issuer's preliminary prospectus, unless the investment dealer has appropriate "ethical wall" policies and procedures in place.
The bookbuilding process is the typical method of price discovery in the context of an IPO in Canada. During the waiting period, investment dealers solicit interest from potential investors at a range of prices. Once the investment dealers have established what the demand level is for the securities (and the price range), the issuer and the investment dealers will come to an agreement on pricing of the offering. At this point, allocations are made between the various potential purchasers and the final prospectus is filed and delivered to potential purchasers.
On almost all offerings, the bookbuilding process involves two separate audiences:
Retail brokerage networks in Canada.
Institutional investors located in Canada and internationally, as permitted.
In most financings, the investment dealers seek a "lead" order from an institutional investor and then build the book with a mix of institutional and retail investors.
Underwriting: equity offering
Equity offering structuring
Offerings can be made through investment dealers acting as underwriters on a "bought deal" or "marketed" basis, or as agents on a "best efforts" basis.
In underwritten offerings, one or more underwriters agree to purchase the securities as principal, on a firm commitment basis. The dealers' commitment is typically subject to limited exceptions contained in an underwriting agreement. If the underwriters subsequently encounter difficulties in profitably reselling the offered securities to the public, the company still receives payment in full of the agreed price for the issue of the securities to the underwriters.
In a "bought deal" underwriting, the underwriters commit to purchase the securities at an agreed price before the transaction is announced publicly. By contrast, in a "marketed" underwritten offering, the company files a preliminary prospectus that does not include the price and the number of securities to be sold. The underwriters market the offering to prospective buyers using the preliminary prospectus. After completion of the marketing, the company and dealers agree on the price and size of the offering, sign an underwriting agreement and file a final prospectus containing deal-specific terms.
In an agency offering, the investment dealers do not purchase the offered securities as principals, but act on a "best efforts" basis as agents of the company. The dealers "market" the offering to potential investors willing to purchase the securities from the company. If some (or in some cases, a specified minimum quantity) of the offered securities are not purchased by the public, the agents do not have an obligation to purchase the balance (or to buy any such securities, if a minimum has been specified) from the company.
Engagement letters and underwriting agreements
It is common practice for the lead investment dealer and the issuer contemplating an offering of securities to enter into an engagement letter or term sheet, setting out some of the basic terms of the offering before executing a definitive underwriting agreement. The engagement letter will usually provide for the subsequent negotiation of a definitive underwriting agreement, setting out the terms of the underwriting in more detail, including:
Representations and warranties.
Prospectus filing obligations (if applicable).
Rights of termination.
Rights of indemnification and contribution.
Representations and warranties
As part of establishing the investment dealers' statutory due diligence defence (see Question 13), a typical underwriting agreement will contain relatively detailed representations and warranties of the issuer covering the offering and the issuer's business. The extent and nature of the representations and warranties is a matter for negotiation between the issuer and the investment dealer.
The underwriting agreement will provide that certain events, if they occur prior to closing or effectiveness of the purchase, will entitle the investment dealers to terminate their obligations to purchase the offered securities (for example, "regulatory out", "disaster out", "material change out", "market out" or "litigation out"). These events can be negotiated between the parties, although investment dealers have over time developed standardised views on the proper formulation of these provisions. An underwriting agreement for a marketed offering may contain a "market out", allowing the investment dealers to terminate if, in their opinion, the securities cannot be profitably marketed. A bought deal cannot contain a "market out" in accordance with the provisions of NI44-101.
A typical underwriting agreement will contain a broad indemnity from the issuer in favour of the investment dealers and their officers, directors, employees and agents, for losses claimed by third parties resulting from:
Misrepresentations in the prospectus or offering memorandum (other than information concerning the investment dealers).
Breaches of the underwriting agreement.
Non-compliance with securities laws.
Orders, inquiries or investigations by the Canadian Securities Administrators.
There is some doubt whether indemnity clauses in underwriting agreements are enforceable in Canada, for public policy reasons.
In a public offering, the investment dealers and the issuer typically negotiate an over-allotment option. This grants the investment dealers a right to purchase additional securities (up to a specified maximum) to cover their over-allocation position at closing and for consequent market stabilisation purposes.
The over-allotment option will be priced at the same price as the main offering, and will expire on a specified date somewhere between the closing date and 60 days after it. Securities regulatory policy restricts the size of over-allotment options to the lesser of 15% of the transaction and the size of the investment dealers' over-allocation position.
Typically, investment dealers or agents receive a commission for their services in connection with the offering, based on a specified percentage of the gross proceeds raised, as set out in the underwriting agreement. This commission varies based on, among other things, the size of the issuer and the frequency with which they access the capital markets. Sometimes the investment dealers do not receive a fee in respect of the sale of a certain portion of the offering (for example, securities sold to existing large securityholders of the issuer, or buyers located by the issuer itself without assistance from the investment dealers).
Underwriters may also receive compensation options or warrants that entitle the investment dealers to purchase securities of the issuer that are the subject of the offering, at the offering price, for a specified time period. The issuance of this type of compensation to the underwriter is generally determined by the stage of development of the issuer, with earlier stage companies being more likely to grant such options or warrants.
The expenses of the investment dealers (including legal expenses) may be paid by the issuer, either in whole or up to a specified amount, depending again on the issuer.
Timetable: equity offerings
A well-organised and prepared company can complete a "bought deal" offering (see Question 17) under a short-form prospectus (see Question 12) in three to four weeks (including all pre-launch preparations that may be required), or a "bought deal" offering under a prospectus supplement to a short-form base shelf prospectus (see Question 12) in seven to ten days, assuming a short-form base shelf prospectus is already in place.
In contrast, a "marketed" underwritten offering or agency offering requires an additional period of marketing (a road show), the length of which varies depending on the circumstances (for example, two to four weeks or more). Preparation time will be required in advance of launching an offering (for example, for drafting of the prospectus, settling of a "bought deal" agreement or French translation of any documents incorporated by reference).
A preliminary long form prospectus must be prepared in respect of an IPO (see Question 12). Such a prospectus must provide significant financial and non-financial disclosure regarding the issuer and requires greater preparation time (an estimated six to eight weeks).
Additionally, the length of time for review of the preliminary prospectus by the applicable securities commission(s) and the length of the period of marketing will be longer (an aggregate estimated four to six weeks). Closing generally occurs seven days following filing of the final long form prospectus.
Although each of the foregoing time estimates is subject to great variation depending on the issuer, market and other factors, an IPO can generally be completed in three to four months, although some do take nine months or more.
Applicable Canadian securities laws prohibit engagement or participation in any act, practice or course of conduct relating to securities (or attempting to do so) that the actor knows, or reasonably ought to know, results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, or perpetrates a fraud on any person.
Ontario Securities Commission Rule 48-501 and the Investment Industry Regulatory Organization of Canada's Universal Market Integrity Rules for Canadian marketplaces impose trading restrictions on dealers and certain related parties involved in a distribution of securities. Purchases of, or bids for, applicable securities are generally prohibited from the later of the date that is:
Two trading days prior to the day the offering price of the security is determined.
The date on which a dealer enters into an agreement or reaches an understanding to participate in the offering.
In either case, the period during which trading restrictions are imposed on dealers ends on the date the selling process ends and all stabilisation arrangements relating to the offered security have been terminated.
There are various exceptions to the dealer trading restriction, including:
For market stabilisation or market balancing activities, where the bid for or purchase of the applicable security is for the purpose of maintaining a fair and orderly market by reducing the price volatility of or addressing imbalances in buying and selling interests, provided that the bid or purchase is at a price which does not exceed a specified price.
Where the applicable security is a "highly-liquid security".
For an unsolicited client order.
Tax: equity issues
In general terms, a non-Canadian issuer is subject to income tax in Canada if it:
Is resident in Canada for the purposes of the Income Tax Act (Canada) (Tax Act).
Carries on business in Canada for the purposes of the Tax Act through a "permanent establishment" for the purposes of a bilateral tax treaty (if applicable).
An issuer that is a corporation is generally resident in Canada for the purposes of the Tax Act if it is incorporated in Canada or has its mind and management in Canada (subject to any tie breaker rules in an applicable bilateral tax treaty).
If a non-Canadian issuer is not resident in Canada (Non-Canadian Issuer) and does not carry on business in Canada, the issuing and listing of the issuer's equity in Canada normally does not give rise to any Canadian tax issues for the issuer.
Regardless of whether an issuer is subject to Canadian income tax or not, there may be a requirement to withhold from payments from:
Fees, commissions or other amounts to non-residents of Canada in respect of services rendered in Canada.
Remuneration to an employee who does work in Canada.
The following is a summary of the principal Canadian federal income tax considerations generally applicable to the holding and disposition of fully participating common shares of a Non-Canadian Issuer that is listed on the TSX or TSXV.
The description below assumes, at all relevant times, that an investor:
Deals at arm's length and is not affiliated with the issuer for the purposes of the Tax Act.
Holds the common shares as capital property for the purposes of the Tax Act.
Is not a person in respect of which the issuer is a "foreign affiliate" for the purposes of the Tax Act.
Does not use or hold, and is not deemed to use or hold, the common shares in the course of carrying on, or otherwise in connection with, a business in Canada.
Canadian resident investors
A Canadian resident investor in common shares of a Non-Canadian Issuer must include, in calculating income for a taxation year, the amount of any dividends (including any amounts deducted for foreign withholding tax on the dividends) received on the common shares. Since the Non-Canadian Issuer is not a Canadian corporation for purposes of the Tax Act:
Dividends received on common shares by an individual are not subject to the gross-up and dividend tax credit rules in the Tax Act.
A corporation receiving dividends on common shares is not entitled to deduct the amount of such dividends in calculating its taxable income under the rules that normally apply to dividends received from Canadian corporations.
To the extent that foreign withholding tax is payable by a Canadian resident investor in respect of any dividends received on common shares, the investor may be eligible for a foreign tax credit or deduction (subject to applicable rules) under the Tax Act.
A disposition by a Canadian resident investor of common shares will generally result in a capital gain (or capital loss) to the extent that the proceeds of disposition, net of any reasonable costs of the disposition, exceed (or are exceeded by) the adjusted cost base to the investor of those common shares.
When investing in any Non-Canadian Issuer, Canadian resident investors need to be aware of the "offshore investment fund property" rules. These rules, in certain circumstances, may require an investor to include a deemed amount in income in each taxation year in respect of the acquisition and holding of the common shares. These rules are complex and their application will potentially depend, in part, on the reasons for an investor acquiring and holding the common shares.
A significant portion of investments by Canadian retail investors may be held through certain types of tax-advantaged Canadian registered plans, such as tax-free savings accounts and registered retirement savings plans (Registered Plans). Accordingly, issuers offering securities to Canadian retail investors generally wish to ensure that the securities are "qualified investments" for these plans. Generally, for this purpose, common shares of any issuer listed on a "designated stock exchange" (which includes the TSX and TSXV) for purposes of the Tax Act would be "qualified investments" for the Registered Plans.
Investors not resident in Canada
Dividends paid, or deemed to be paid, in respect of common shares by a Non-Canadian Issuer to a non-resident of Canada are not subject to Canadian withholding tax or other income tax under the Tax Act.
A non-resident of Canada who disposes of common shares is not subject to Canadian income tax in respect of any capital gain realised on the disposition, unless the common shares are "taxable Canadian property" of the investor for purposes of the Tax Act and no exemption is available under an applicable bilateral tax treaty.
Generally, common shares of a Non-Canadian Issuer that are listed on the TSX or the TSXV are not taxable Canadian property of a non-resident of Canada unless, at any time during the prior 60-month period, both:
The investor, or persons with whom the investor deals, did not deal at arm's length (or the investor together with such persons) and owned 25% or more of the issued shares of any class or series of the Non-Canadian Issuer.
More than 50% of the fair market value of the common shares was derived directly or indirectly from certain types of assets, including real or immoveable property situated in Canada, Canadian resource properties or timber resource properties, and options, interests or rights in respect of any of the foregoing.
National Instrument 51-102 - Continuous Disclosure Obligations (NI 51-102) and the applicable stock exchange rules are the main sources of the ongoing disclosure obligations for reporting issuers. These disclosure obligations fall into two broad categories:
Press releases and material change reports. NI 51-102, together with the rules of the TSX and TSXV, requires immediate disclosure, by press release, of all material with respect to the affairs of an issuer. Material changes must also be disclosed by filing a material change report disclosing the nature and substance of the change within ten days of the material change, subject to limited confidentiality in certain circumstances.
Material contracts/documents affecting securityholder rights. NI 51-102 requires filing of documents affecting the rights of securityholders and, subject to certain exceptions, material contracts entered into by an issuer.
Business acquisition reports. NI 51-102 requires filing of business acquisition reports by an issuer in respect of all significant acquisitions, including historical and pro forma financial statements in respect of the acquired business.
Annual information form (AIF) . An issuer's AIF is an annual filing intended to provide background information to investors about the nature of the issuer and its business operations and prospects.
Annual and interim financial statements. NI 51-102 requires issuers to file audited annual financial statements for each completed financial year, together with comparative financial statements relating to the preceding financial year. Issuers must also file standalone, unaudited year-to-date interim financial reports on a quarterly basis (except in respect of the fourth quarter), which must include a comparative statement to the end of the corresponding period in the previous financial year.
Management discussion and analysis (MD&A). MD&A is supplemental analysis and explanation which accompanies but does not form part of the financial statements, and must be filed concurrently with a reporting issuer's interim and annual financial statements. MD&A requires the management of a corporation to explain in narrative form the corporation's financial conditions and future prospects.
Annual and interim certification of disclosure. NI 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings requires the CEO and CFO of an issuer to certify the disclosure contained in the issuer's annual and interim financial statements. This certificate includes certification of internal control over financial reporting and disclosure controls and procedures.
Proxies, proxy solicitation, management information circular and voting results. Under N l 51 -102, the management of an issuer must send by mail to each securityholder of the reporting issuer, before each securityholders' meeting, a form of proxy for use at the meeting. The form of proxy must be sent either prior to, or simultaneously with, the notice of the meeting, and must be accompanied by a management information circular. For information circulars prepared in connection with an annual general meeting or the election of directors, an issuer must also include information on executive compensation in the form prescribed in Form 51-102F6. Canada has adopted a "notice and access" regime which allows for online communication with shareholders with respect to proxy-related materials.
Technical reports for mineral projects. NI 43-101 requires issuers to file within a specified period of time a technical report in the form prescribed by the instrument in certain circumstances, including to support first time disclosure or changes of mineral resources, mineral reserves or the result of a preliminary economic assessment on a property that is material to the issuer.
Annual reports on reserves data and other oil and gas information. NI 51-101 requires oil and gas issuers to issue and file, on an annual basis, a statement of the issuer's reserves data and other information specified in Form 51 -101F1, as at the last day of the most recent financial year. The annual information required by NI 51-101 can be provided in standalone documents or included as part of an issuer's AIF.
Corporate governance practices. NI 58-101 - Disclosure of Corporate Governance Practices requires issuers (unless otherwise exempted) to disclose their corporate governance policies in the form required under Form 58-101F1, either in its AIF or management information circular, as applicable.
National Instrument 71-102 - Continuous Disclosure and Other Exemptions Relating to Foreign Issuers permits "SEC foreign issuers" and "designated foreign issuers" to file with the Canadian Securities Administrators their home country continuous disclosure filings instead of parallel Canadian continuous disclosure filings, provided certain conditions are met. Additionally, all documents must be provided to Canadian securityholders in the same manner and at the same time as they are provided to foreign securityholders.
Where an issuer is in default of filing continuous disclosure documents, the Canadian Securities Administrators can issue either a:
Cease trade order (which broadly prohibits trading in the securities of the issuer by persons or companies identified in the order).
Management cease trade order (which so prohibits only the CEO, CFO and, at the discretion of the regulators, the board of the issuer).
Any person or company that acquires or disposes of an issuer's securities in the secondary market during the period of time that a material change has not been disclosed as required has a right of action for damages against, among others, the issuer and each director and officer of the issuer who authorised, permitted or acquiesced in the failure to make such timely disclosure.
Any director or officer of an issuer who authorises, permits or acquiesces in making a statement in a continuous disclosure filing that, in a material respect and at the time and in light of the circumstances in which it was made, is misleading or untrue, or does not state a fact that is required to be stated or that is necessary to make the statement not misleading, can be personally liable to a fine of no more than CAD5 million, or to imprisonment for up to five years less a day, or to both.
Market abuse and insider dealing
Restrictions on market abuse/insider dealing
The Universal Market Integrity Rules for Canadian marketplaces prohibit market participants from, directly or indirectly, engaging or participating in the use of any manipulative or deceptive method, act or practice in connection with any order or trade on a marketplace, if the participant knows, or ought reasonably to know, the nature of the method, act or practice.
Applicable Canadian securities laws also provide that a person "in a special relationship" with a public issuer is prohibited from:
Purchasing or selling securities of the public issuer with the knowledge of a material fact or material change with respect to the public issuer that has not been generally disclosed.
Informing, other than in the necessary course of business, another person of a material fact or material change with respect to the public issuer before the material fact or material change has been generally disclosed.
Penalties for market abuse/insider dealing
Applicable Canadian securities laws provide, as a general punishment, that every person or company that contravenes such laws is guilty of an offence and, on conviction, liable to a fine of no more than CAD5 million or to imprisonment for a term of no more than five years less a day, or both.
Further, every director or officer who authorises, permits or acquiesces in the commission of such an offence, whether or not a charge has been laid or a finding of guilt has been made, is guilty of an offence, and liable on conviction to a fine of no more than CAD5 million or to imprisonment for a term of no more than five years less a day, or both.
A person who violates the insider trading prohibition is liable for the specific punishment of a fine of an amount no less than the profit made by the person because of the contravention, and for a fine of no more than the greater of:
An amount equal to triple the profit made or loss avoided by that person because of the contravention.
A person who violates the insider trading prohibition can also be subject to the specific punishment of a term of imprisonment of no more than five years less one day.
Every person that violates the insider trading prohibition is also liable to compensate the seller or buyer of the securities, as the case may be, for damages as a result of the trade, unless that person or company proves that either:
They reasonably believed that the material fact or material change had been generally disclosed.
The material fact or material change was known, or ought reasonably to have been known, to the seller or buyer.
Further, if an insider, affiliate or associate of the public issuer violates the insider trading prohibition, that person is accountable to the reporting issuer for any benefit or advantage received as a result of the transaction, unless the person proves that such person reasonably believed that the material fact or material change had been generally disclosed.
The TSX or TSXV can de-list an issuer if:
The issuer (or any of its significant subsidiaries) has become insolvent or bankrupt.
The financial condition and/or operating results of the listed issuer appear to be unsatisfactory.
It appears that the public distribution, price, or trading activity of the securities has been so reduced as to make further dealings in the listed securities unwarranted.
The issuer fails to comply with the requirements and policies of, or agreements with, TSX or TSXV, as applicable.
The issuer substantially discontinues or materially changes the nature of its business.
A listed issuer can voluntarily de-list its securities, although the applicable exchange may require a majority of minority shareholder approval for the de-listing application, if the exchange is not satisfied that a satisfactory alternative market exists for the listed shares. De-listing can occur voluntarily as a result of a merger or acquisition, or at the request of the exchange.
The Canadian Securities Administrators are considering reforms in many areas of securities law, including available prospectus exemptions (including to facilitate capital revising by start-up and early stage companies).
Most significantly, the Canadian federal government and several provincial governments recently entered into a memorandum of agreement formalising the terms and conditions of a co-operative capital markets regulatory system, and released consultation drafts of uniform provincial capital markets legislation and complementary federal legislation that are proposed for enactment.
Toronto Stock Exchange and TSX Venture Exchange
Description. The official website of the Toronto Stock Exchange and the TSX Venture Exchange.
Paul D Davis, Partner
Professional qualifications. Ontario, Canada 1988
Areas of practice. Mergers and acquisitions; proxy fights; corporate governance/finance; business restructuring; securities and business law matters for public and private issuers.
Will Van Horne, Partner
Professional qualifications. Ontario, Canada 2003; Alberta, Canada 2006
Areas of practice. Corporate finance; securities regulation; debt and equity financings and mergers and acquisitions.
Adam Kline, Counsel
Professional qualifications. Ontario, Canada 2005
Areas of practice. Securities; corporate finance; public and private mergers and acquisitions.
Kosta Kostic, Partner
Professional qualifications. Québec, Canada 2002
Areas of practice. Corporate finance; securities and mergers and acquisitions matters.
Christine Man, Partner
Professional qualifications. British Columbia, Canada 2006
Areas of practice. Corporate and individual income tax and commodity tax matters; corporate structuring and reorganisations; mergers and acquisitions; securities offerings; corporate financing; cross-border and international transactions.