TSX adopts new rules for pricing of public offerings

On April 20, 2023, the Toronto Stock Exchange (TSX) adopted—effective immediately—amendments to Section 606 – Prospectus Offerings of the TSX Company Manual to clearly define the factors that the TSX will consider in determining whether a prospectus offering is a bona fide public offering (the Amendments).

In addition, the TSX has issued TSX Staff Notice 2023-0002 (the Staff Notice) to provide updated guidance on pricing a public offering or private placement where there has been recent disclosure of material information.

What you need to know

• In order to constitute a bona fide public offering, the Amendments require the offering to be “Broadly Marketed”, meaning 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 substantially all Canadian investment dealers.
• The TSX will now use the most recent closing price of the issuer’s listed securities as the reference price when analyzing discounts on prospectus offerings (as opposed to the five-day VWAP).
• If there is no insider participation in the prospectus offering, the TSX will generally accept the offering price of the securities offered regardless of the size of the discount.
• If the offering price is less than, or equal to, a 15% discount to the closing price, the TSX will permit insider participation in the offering up to their pro rata interest in the issuer. Any amount of insider participation that exceeds their pro rata interest will be reviewed under the TSX private placement rules.
• If the offering price exceeds a 15% discount to the closing price, the TSX will consider all insider participation in the offering under its private placement rules.
• As a result of the Amendments, we expect discounts on public offerings will effectively be capped at 15% to the closing price, and issuers and dealers will carefully consider insider participation in the public offering in light of potentially triggering shareholder approval requirements under the TSX private placement rules.
• Where an issuer seeks to price a financing following the recent dissemination of material information, the TSX will not include pre-dissemination trading in the calculation of the market price. Instead, the TSX will generally expect the market price to be assessed based on: (i) in a prospectus offering, the most recent closing price; and (ii) in a private placement, the one-day, volume-weighted average trading price, in both cases reflecting one clear trading session post-dissemination of the material information.

Background to the Amendments

Section 606 of the TSX Company Manual outlines the factors that the TSX will consider when assessing whether a distribution of securities by prospectus is a bona fide public offering, or whether the offering should, instead, be subject to review under, and compliance with, the TSX’s private placement rules under Section 607 – Private Placements (the Private Placement Rules) which, absent shareholder approval, impose certain limitations on an offering (e.g., discount, dilution and insider participation restrictions).

Prior to the Amendments, the TSX Company Manual did not provide details with respect to the relative weighting or importance of the enumerated factors when assessing whether a prospectus offering constitutes a bona fide public offering under TSX rules.

Following consultation with various market participants, on December 1, 2022 the TSX issued for public comment proposed amendments to Section 606 of the TSX Company Manual. Following the public comment period, on April 20, 2023 the TSX adopted the Amendments—effective immediately—substantially in the form of the proposed amendments.

The Amendments

The Amendments set out the following factors that the TSX will consider when determining whether or not a prospectus offering constitutes a bona fide public offering:

• Broadly Marketed – A bona fide public offering must be “Broadly Marketed”, meaning 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 substantially all Canadian investment dealers. In the event that a prospectus offering is not “Broadly Marketed”, the TSX will review the entire offering under the Private Placement Rules.
• Calculating Offering Price Discounts – Prior to the Amendments, the TSX generally used the five-day VWAP of an issuer’s securities when calculating discounts for prospectus offerings and private placements. The TSX will now use the closing price of the most recently completed trading session of the issuer’s listed securities when calculating discounts on prospectus offerings.
• Offering Price Discounts and Insider Participation – The TSX generally believes that deference should be given to an issuer’s board of directors in fulfilling their fiduciary responsibilities when pricing a public offering. However, the level of insider participation in the offering may lead to greater TSX scrutiny of the offering price discount. Under the Amendments, the TSX will now review prospectus offerings within the following framework:
  • If there is no insider participation in the prospectus offering, the TSX will generally accept the offering price of the securities, regardless of the size of the discount.
  • If the offering price is less than, or equal to, a 15% discount to the closing price, the TSX will permit insider participation in the offering up to their pro rata interest in the issuer. Any amount of insider participation that exceeds their pro rata interest will be reviewed under the Private Placement Rules.
  • If the offering price exceeds a 15% discount to the closing price, the TSX will consider all insider participation in the offering under the Private Placement Rules.
  • As a result of the Amendments, we expect discounts on public offerings will effectively be capped at 15% to the closing price, and issuers and dealers will carefully consider insider participation in the public offering in light of potentially triggering shareholder approval requirements under the Private Placement Rules.

Pricing in the context of recent disclosure of material information

The TSX has previously provided guidance that the “Market Price” of a financing should reflect all material events, changes or announcements (Material Information).

Under the Staff Notice, in cases where an issuer seeks to price a financing following the recent dissemination of Material Information, the TSX will view the Market Price as follows: (i) in respect of a prospectus offering, the closing price of the most recently completed trading session; and (ii) in respect of a private placement, the one-day, volume-weighted average trading price, in both cases reflecting one clear trading session post-dissemination of the Material Information.

By way of example, in connection with a public offering, if Material Information is disseminated pre-market on Monday, the Monday closing price may be used. If Material Information is released on Monday at 11:00 a.m. (EST), the Tuesday closing price may be used.

The TSX may use discretion to determine an alternate formula in cases where the closing price or one-day, volume-weighted average trading price, respectively, does not appear appropriate, such as where the stock does not appear sufficiently liquid.

In cases where an issuer seeks to price a financing in the normal course, absent recent dissemination of Material Information, the TSX will typically expect the Market Price to be assessed based on: (i) in respect of a prospectus offering, the closing price of the most recently completed trading session; and (ii) in respect of a private placement, the five-day, volume-weighted average trading price.

These changes do not impact the TSX’s previous guidance regarding pricing an offering while an issuer possesses undisclosed Material Information (for example, when an issuer plans to undertake an offering to finance an undisclosed acquisition). In these circumstances, the TSX will continue to permit an offering to be priced prior to the release of Material Information if it is satisfied that the proposed transaction would not have been approved by the issuer’s board but for the concurrent agreement in respect of the offering.

Implications

The Amendments and the Staff Notice are welcome developments for the Canadian capital markets as they provide clarity, predictability and greater transparency into the TSX’s policies with respect to the pricing of offerings.

Issuers and dealers are cautioned, however, to carefully consider insider participation in public offerings where the offering price exceeds a 15% discount to the closing price. For example, issuers with a stock price greater than $2 that exceed a 15% discount on a prospectus offering should ensure that there is no insider participation. Under the Amendments, such insider participation would be reviewed under the Private Placement Rules, and a discount in excess of 15% in a private placement by such issuers generally requires shareholder approval for the offering to close.