Legal Updates

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Update

Monday, February 29, 2016

Introduction

In December 2015, the TSX Venture Exchange (the “TSXV”) published Revitalizing TSX Venture Exchange – Canada’s Public Venture Market (the “White Paper”), a white paper intended to identify proposed solutions and outline an action plan to better meet the needs of the TSXV’s clients, ignite renewed interest on the part of market participants in the TSXV, and “reinvigorate and revitalize” Canada’s public venture market. The TSXV engaged over 130 issuers across various sectors – natural resources, technology, life sciences and financial services, to name a few – and numerous other market participants (including investment bankers, accountants, securities lawyers and senior management of brokerage firms) to provide the feedback that would be the genesis for the White Paper.

The TSXV and its predecessors have been a vital part of the Canadian capital markets for many years, providing small to mid-cap issuers with access to capital and a platform to pursue a senior listing, while also providing investors with liquidity. However, the Canadian public venture market, and the TSXV in particular, finds itself in challenging times. The TSXV notes in the White Paper that the past few years have seen a challenging environment develop for Canada’s public venture market, with macroeconomic factors (including a pervasive slump in commodity prices, shifting demographics and poor market performance) highlighting vulnerabilities in the market. These factors have resulted in a decline in investor participation and broker-dealer activity in Canada’s public venture market.

Following publication of the White Paper, the TSXV has held ‘Town Hall’ meetings at major cities across Canada to solicit commentary on the White Paper and on the condition of the Canadian public venture market in general. 

Summary of the White Paper

The White Paper categorizes the TSXV’s various initiatives under three prongs, or ‘commitments’, as set forth below.

Reduce administrative and compliance costs without compromising investor confidence

The TSXV intends to reduce the administrative and compliance costs of its listed issuers without compromising investor confidence by:

  • eliminating the general requirement for sponsorship, requesting an independent review only in limited cases, which will reduce cost and delay of listing transactions;
  • revising its shareholder approval requirements so that they will not generally apply to inactive companies completing an arm’s length transaction, such as a change of business or reverse takeover;
  • recognizing active and proven directors and officers of TSXV-listed companies such that their ongoing compliance obligations are made less onerous (for example, by implementing a “NEXUS-type” of status);
  • providing automated online filings;
  • implementing a more responsive system to accelerate transaction processing and foster greater transaction certainty, including committing to provide comments within a specified number of days;
  • eliminating its escrow requirements and applying only the Canadian Securities Administrator’s national policy on escrow, which will simplify the new listing process; and
  • potentially eliminating the concept of Tier I and Tier II boards of the TSXV.

Expand the base of investors financing companies and generally enhance liquidity

The TSXV notes in the White Paper that it needs to focus on supporting the dealers who have expertise in, and on attracting other dealers to, the public venture capital space. The TSXV will seek to accomplish this by increasing investor awareness of the marketplace and past success stories of TSXV-listed companies. The TSXV recognizes that many early-stage public companies are not covered by traditional research analysts, and thus there is a need for additional tools and initiatives to help investors identify and better understand investment opportunities in order to increase the number of investors participating in the market. Among others, the TSXV intends to pursue the following initiatives:

  • bolstering its business development programs to create awareness of Canada’s public venture market and to showcase TSXV-listed companies to fund managers, retail investors, investment advisors, investment bankers and research analysts, with the goal of benefiting not only these specific companies but also TSXV-listed issuers in general via the increased investor awareness and liquidity that these showcases are anticipated to generate. To this end, the TSXV has committed to presenting over 100 issuers to these audiences in 2016, at no cost to such issuers;
  • reducing the sometimes complicated barriers to U.S. investors wishing to trade stocks on the TSXV;
  • working to facilitate more direct communication between issuers and investors with a view to strengthening the relationships between them; for instance, by developing mobile and web-based tools to stream summaries of treasury offerings from TSXV-listed companies;
  • introducing a “Market Making” program on the TSXV by facilitating arrangements between issuers and qualified “Market Makers”;
  • introducing new investor analytic programs and research products (for example, the TSXV is beta-testing a new stock screening tool intended to leverage crowd-sourced knowledge);
  • engaging with the Investment Regulatory Organization of Canada (“IIROC”) to obtain clarity regarding the application of IIROC’s suitability standards, which some members of the brokerage community believe are unclear;
  • amending and simplifying its Continued Listing Standards and providing additional tools for companies to reactivate from the NEX board (being a trading forum for listed companies that have fallen below the TSXV’s ongoing listing standards);
  • advocating for additional prospectus exemptions for public companies, in order to provide issuers with additional financing options; and
  • promoting financial literacy and capital markets education in universities and colleges across Canada.

Diversify and grow the stock list to increase marketplace attractiveness

Despite there being almost 500 non-resource companies currently listed on the TSXV (representing approximately 30% of TSXV-listed issuers), the White Paper notes that the pervasive impression is that the TSXV “lacks diversity” and is “too resource oriented”. In its conversations with market participants, the TSXV found that a number of issuers felt that this perception deterred investors looking for investment opportunities in non-resource early-stage public companies, and that it perhaps was a disincentive from pursuing a TSXV listing for some innovation companies. In some ways, the TSXV is a victim of the success of its past initiatives to appeal to the natural resource sector, and now a re-branding of sorts may be required to appeal more broadly to early-stage companies without detracting from its commitment to its resource clients. The TSXV intends to address this issue through the following initiatives:

  • hiring a dedicated team (including representatives in Boston and Palo Alto) to bring new companies from diverse industries to the TSXV, and to help these companies secure financings;
  • revising its Capital Pool Company policy to make the program more flexible and attractive to companies in all industry sectors;
  • tailoring TSXV policies further to reflect the needs of non-resource companies;
  • increasing efforts to ensure private equity firms, venture capital and angel investors consider the TSXV as an effective exit strategy for early-stage companies;
  • exploring alliances with other exchanges that could benefit its clients;
  • engaging with Exchange Traded Fund firms to develop more investment products that may include baskets of TSXV-listed companies; and
  • advocating for early-stage public companies to be fully eligible for the refundable investment tax credit under the federal Scientific Research and Experimental Development (“SR&ED”) program, noting that, as the regime currently stands, Canadian innovation companies lose most of the benefits of their SR&ED credits when they go public and, as a result, they may be deterred from accessing public venture capital.

Commentary

As a national exchange with its roots in provincial capital markets, the TSXV is in a good position to comment on the state of the Canadian public venture market and to advocate for the interests of venture issuers. Some of the initiatives outlined in the White Paper are under the direct control of the TSXV and are therefore more readily achievable such as the initiatives aimed at improving the experience of existing TSXV-listed issuers. For other initiatives, such as the proposed changes in the treatment of SR&ED credits for public companies and developing additional prospectus exemptions, as outlined above, the TSXV will need to take advantage of its unique position within the Canadian capital markets and play an advocacy role on behalf of venture issuers in order to influence regulators and other market participants to make beneficial changes.

The White Paper also outlines a number of business development and sales and marketing initiatives. During the Town Hall held in Toronto on January 20, 2016, the TMX Group’s Nick Thadaney discussed how the TSXV has historically shied away from more assertive marketing efforts, but will now become more active in this area.  The TSXV’s emphasis on marketing is no doubt a response to increasing competition due to the emergence of viable alternatives for small and mid-cap companies, including from the Canadian Securities Exchange and the Aequitas NEO Exchange, private capital and the advent of web-based private company marketplaces.

While the initiatives outlined in the White Paper will no doubt have a positive impact on the Canadian public venture market if the TSXV is able to follow through on some or all of them, the TSXV will have to pay careful attention to managing the conflicts of interest that arise due to its quasi-regulatory function. A reduction in the quality of listed issuers caused by, for example, a more liberal approach to regulation or marketing efforts by the TSXV, would undermine the credibility and integrity of the Canadian capital markets domestically and abroad. 

Absent from the White Paper and quickly glossed-over at the Town Hall in Toronto is the issue of inactive or non-compliant, so-called ‘zombie companies’ listed on the TSXV. By one estimate, as many as 600 natural resource companies listed on the TSXV are offside its Continuous Listing Requirements, with an estimated negative $2 billion working capital among them. While the sheer number of such issuers arguably has a deleterious impact on the accessibility of the market for investors, not to mention on the reputation of the TSXV and its listed issuers, there seemed little appetite on the part of the TSXV or the attendees of the Town Hall in Toronto to do anything about them. Attendees of the Town Hall in Vancouver were reportedly much more vocal about having these companies removed from the TSXV.

This all being said, credit is due to the TSXV for preparing the White Paper and holding the Town Hall meetings. These are positive, proactive initial steps to addressing the challenges currently facing the TSXV and the Canadian public venture market in general.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.