Background to Exempt Markets
In 2014, the various provincial and territorial commissions conducted reviews of the existing exempt market regime so as to determine if changes could be made that would facilitate the raising of private equity for small and medium sized enterprises, while protecting investor interests. In March of 2014, the Ontario Securities Commission (“OSC“) published for comment, proposals for the following four new capital raising prospectus exemptions in Ontario (the “Proposed Exemptions“), each of which is subject to a number of conditions:
- an offering memorandum (“OM“) prospectus exemption,
- a family, friends and business associates prospectus exemption,
- distributions by a reporting issuer (other than an investment fund) listed on a specified exchange to its existing security holders (the “Ontario Existing Security Holder Prospectus Exemption“), and
- a crowdfunding prospectus exemption in addition to regulatory requirements applicable to a crowdfunding portal.
For more information on the above exemptions, please refer to our Spring 2014 Securities Practice Notes.
Later that year, in November, the OSC announced1 that the proposed Ontario Existing Security Holder Prospectus Exemption would formally take effect in February of 2015. All other Canadian jurisdictions (other than Newfoundland and Labrador) have adopted the Canadian Securities Administrators (“CSA“) Existing Security Holder Prospectus Exemption. The Ontario Existing Security Holder Prospectus Exemption is similar to, and substantially harmonized with, the CSA one. For more information on the Ontario Existing Security Holder Prospectus Exemption, please refer to our December 2014 Securities Practice Notes.
All Canadian provincial and territorial jurisdictions (other than Ontario) already have OM and family, friends and business associates prospectus exemptions. The Alberta, Quebec, Saskatchewan and New Brunswick securities regulators (the “Participating OM Jurisdictions“) have published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106“) relating to the OM prospectus exemption. Staff of the Participating OM Jurisdictions have coordinated their efforts with the OSC in developing proposals for changes to the OM prospectus exemption.
In recent years, a considerable portion of the capital raised by both public and private firms has been transacted in exempt/private markets via one or more of the various existing prospectus and registration exemptions. The introduction and ultimate passage into law of the Proposed Exemptions in Ontario, the amendments to the OM prospectus exemption in the Participating OM Jurisdictions and the crowdfunding prospectus exemptions, where applicable, in Canadian provincial and territorial jurisdictions (other than Ontario) will no doubt substantially increase this portion going forward. In response to the burgeoning existing and prospective market demand in the exempt market sector, the TMX Group recently launched, via its wholly-owned subsidiary, Shorcan Brokers Limited (“Shorcan“), TSX Private Markets (“TSX PM“), a new business platform designed to support efficient capital raising and to facilitate secondary trading within Canada’s exempt market.
Background to TSX PM
Though not a marketplace itself, TSX PM operates as a service designed to enhance access to capital for private and public issuers, and to facilitate liquidity for approved dealers and their accredited investors. Importantly, it provides small private companies with opportunities to secure key capital in the early to mid-stages of their development. As Canadian provincial and territorial regulations governing the exempt market continue to loosen, the usefulness and applicability of TSX PM stands to increase considerably.
TSX PM facilitates:
- exempt market capital raising for domestic and international private and public companies, including public company private placements;
- secondary trading of public company “hold period” securities, issued pursuant to a private placement; and
- secondary trading of other exempt market securities (including various categories of corporate equity, general and limited partnership units, and debt).
TSX PM is operated by Shorcan, a registered exempt market dealer in every provincial and territorial jurisdiction in Canada. TSX PM provides a dealer-to-dealer voice-brokered transaction service complemented by an information website. As with the public markets, TSX PM is particularly attractive as a microcosm therof to capital intensive companies such as those in the real estate, pharma, mining and infrastructure industries.
Kevan Cowan, President, TSX Markets and Group Head of Equities, TMX Group, remarked that: “Canada’s private markets represent a great opportunity for us. The launch of TSX Private Markets has generated a great deal of interest in the dealer community and we are pleased with the early response. We are currently engaged in the process of ‘on-boarding’ exciting companies and products.”
TSX PM Approved Participants
While all approved TSX PM Approved Participants, which include Investment Industry Regulatory Organization of Canada (“IIROC“) member dealers, exempt market dealers and other registered firms as defined in National Instrument 31-103 Registration Requirement, Exemptions and Ongoing Registrant Obligations, being portfolio managers, fund managers, and institutional permitted clients, that are domiciled in Canada, will be able to view capital formation and secondary trading opportunities on the TSX PM platform, only IIROC member and exempt market dealer ones can trade via the TSX PM platform. To become an Approved Participant, an organization must complete and submit to Shorcan the TSX PM application accessible via TSX PM’s official website. To date, TSX PM has signed up 25 brokers as Approved Participants.
Benefits of Using TSX PM
To Approved Participants
- brand recognition as a TSX PM “Approved Participant”;
- broad distribution and visibility of offerings for dealers, permitted clients, investors, and companies;
- exclusive access to TSX PM’s voice-brokered service and its informational website with capacity to view detailed company profiles and disclosure documents;
- three levels of market depth associated volumes that provide price discovery, the last trade price and volume, and the ability to mark previously illiquid assets to market;
- trading commissions for secondary market transactions;
- secondary liquidity for investors wishing to exit from securities with set redemption dates; and
- settlement and clearing of all eligible secondary trades on a T+3 basis through CDS Clearing and Depository Services Inc. (“CDS“).
- capacity to fill treasury offerings (there is a one-time due diligence cost of $5,000 for companies to become registered on the TSX PM) through TSX PM’s network of Approved Participants;
- liquidity for investors, including access to a managed liquidity program that allows companies to restrict secondary market trading amongst a predefined group of investors, as stipulated by the subject company;
- TSX PM-facilitated introductions to Approved Participants and private market industry intelligence to help structure and underwrite exempt market offerings (the applicable TSX PM fee for each offering is $2,000, plus a brokerage commission to be negotiated);
- recognition as one of a limited number of companies approved to post on TSX PM; and
- preparation for “go-public” transactions prior to applying for listing on the Toronto Stock Exchange (“TSX“) or the TSX Venture Exchange (“TSXV“).
- a directory of TSX PM approved IIROC member dealers and exempt market dealers, thereby enabling investors to gain access to new exempt market investment opportunities;
- access to secondary market liquidity through an Approved Participant prior to redemption or a go-public transaction; and
- settlement and clearing of all eligible secondary trades through CDS on the same basis as enumerated above.
Capital Formation Offerings and Secondary Securities Trading
A company that wishes to post a capital formation offering on TSX PM must first obtain the sponsorship of an Approved Participant who is registered either as an IIROC member dealer or as an exempt market dealer in the applicable Canadian jurisdiction, and whose registration is in good standing. The sponsoring Approved Participant is responsible for conducting its own due diligence on the subject company. Once TSX PM has reviewed a company’s application package and issued formal approval, the applicable class(es) of the company’s securities will be eligible to be posted on the TSX PM platform. The review is not a substitute for Approved Participant or investor due diligence; it is to determine whether a company is suitable for the TSX PM platform. (TSX PM does not provide any advice or recommendations on any specific securities.) Public companies that have gone through the TSX or TSXV listing process do not need to go through the TSX PM’s approval process as well.
Both private and public companies may post their offerings on the TSX PM platform and TSX PM will facilitate secondary trading of their securities, including four month “hold period” securities for public companies. Approved Participant sponsorship is not required for the secondary trading process. Shorcan/TSX PM will ultimately look to taking a commission on each secondary trade but currently they have instituted a commission “holiday” on such trades.
Obtaining Access to Invest on the TSX PM Platform
Individual investors may obtain partial access to TSX PM by registering directly on tsxprivatemarkets.com. An individual investor’s view will be limited to general company information and whether a posted company has a capital formation offering and/or secondary trading opportunities available, but the investor will not be able to directly view details of those offerings and opportunities. She/he will need to contact an Approved Participant in order to get such details.
Ultimately, all transactions, including transactions by individual investors to invest in a capital formation offering, must be made through an Approved Participant who is also registered as an IIROC member dealer or exempt market dealer. The Approved Participant must also determine that the individual investor meets the requirements of at least one of the applicable exemptions for the relevant securities available under National Instrument 45-106 Prospectus and Registration Exemptions.
Approved Participants on the TSX PM platform will have access to detailed company information, including tear sheets, OMs, available offerings, secondary market quotes and other associated documentation (such as company presentations, press releases, industry related reports and other company-specific documents) approved by the company for viewing by Approved Participants. Audited or reviewed financial statements (which are required for the TSX PM approval process) are only made available for viewing by Approved Participants at each subject company’s discretion.
The Clearing and Settlement Process
CDS is Canada’s national securities depository, clearing and settlement hub, with accountability for the safe custody and movement of securities, accurate record keeping, processing of post-trade transactions and the collection and distribution of entitlements relating to depository-eligible securities.
All trades of CDS-eligible securities executed on TSX PM will be reported to CDS for settlement between CDS participants. Companies desiring to use CDS to facilitate trades of their private securities are required to request depository eligibility of their applicable class(es) of securities directly with CDS by first obtaining an ISIN for each such class of securities. Canadian companies may request an ISIN from CDS by submitting a request through the CDS Solutions official website (www.cdssolutions.ca). Public companies with “hold period” securities to trade are encouraged to apply for a separate ISIN for such securities. (Companies not wanting to use CDS to facilitate transactions will need to trade physically certificated securities bilaterally between the counterparties.)
CDS requires documentation in final form in order to conduct the eligibility assessment of each security. The required documentation must confirm the legal name, domicile and incorporation status of the company, and include a description of the various security attributes, such as type of issue, form of certification, security holder options, security agents, critical dates, etc. Typical documents provided to CDS include: the constating documents, subscription agreements, OMs and management information circulars.
1 Ontario Securities Commission, Notice of Amendments to Ontario Securities Commission Rule 45-501, “Ontario Prospectus and Registration Exemptions” (27 November 2014) online: OSC <http://www.osc.gov.on.ca>.