TSXV Amendments to Policy 5.1 – Loans, Loan Bonuses, Finder’s Fees and Commissions

Introduction

Earlier this year, the TSX Venture Exchange (“TSXV”) implemented amendments to Policy 5.1 – Loans, Loan Bonuses, Finder’s Fees and Commissions (“Policy 5.1”).  The amendments to Policy 5.1 provide for, among other non-substantive changes of a clarifying nature, certain new requirements and limitations involving loan bonuses and commissions paid by an issuer in connection with financing transactions and finder’s fees paid by an issuer in connection with non-financing transactions.  The stated principal purpose of the requirements and limitations set out under Policy 5.1 is to ensure proper notice and disclosure of any transactions and payments, and to mitigate the possibility that the consideration received by an issuer in exchange for loan bonuses, commissions and finder’s fees is not bona fide or otherwise inequitable. 

Substantive Amendments

Notable substantive changes were made to the following three areas:

1.    Loan Bonus Requirements and Limitations

• Loan bonuses comprised of shares listed on the TSXV or non-transferable warrants to the lender or guarantor, as the case may be, are generally prohibited if it is evident that the issuer has the means or ability to repay the loan in the ordinary course or the potential risk of non-payment of the loan has otherwise been materially mitigated at the time the loan is made; however, if certain prescribed conditions are met to the satisfaction of the TSXV, it may exercise its discretion with respect to the requirement that the ability of the issuer to repay the loan not be evident. 
• Loan bonuses may not be granted to a lender or guarantor in relation to a loan or debt instrument that is convertible into shares listed on the TSXV.  (With respect to such convertible securities, the notice and filing requirements of Policy 4.1 – Private Placements or Policy 4.2 – Prospectus Offerings, as applicable, must be complied with).
• The limits for both bonus shares and bonus warrants are now calculated using the applicable market price, not the discounted market price.  Accordingly, the maximum number of shares that may be issued as a loan bonus is now 20% of the total dollar amount of the loan/guarantee divided by the market price of the shares.
• If the loan bonus is comprised of only warrants, the limit on bonus warrants has increased from 40% to 100% of the value of the loan (i.e. 100% warrant coverage).
• For loans having a term of less than one year, bonus warrants are permitted, but bonus shares are generally prohibited (however, the TSXV may exercise its discretion in respect of bonus shares if certain prescribed conditions are met to its satisfaction).
• Only one loan bonus may be granted on a loan regardless of the term of the loan, such that a loan bonus may not be granted to both the lender and the guarantor in respect of a loan, and in the case of multiple guarantors for the same loan, the aggregate loan bonus granted to the guarantors must not exceed the prescribed bonus limits.
• Notwithstanding that only one loan bonus may be granted on a loan, if a loan is renewed or extended beyond its original term, Policy 5.1 contains provisions related to the acceptability of the issuance of a loan bonus in respect of a loan renewal or extension.  

 2.    Restrictions on “Finding Oneself”

The TSXV will not permit an issuer to pay, directly or indirectly, either: (i) a commission to an investor in respect of such person’s own investment in the issuer; or (ii) a finder’s fee to a vendor or purchaser in respect of such person’s sale or purchase of assets or services to or from the issuer.  However, limited exceptions to this general rule include the following:  

• commissions payable to a company that is a registrant (i.e. registered under applicable securities laws) in consideration for any securities it acquires as principal pursuant to a brokered financing for which it is acting as agent or underwriter (an “Underwriter Purchase”);
• commissions or finder’s fees payable to a person in respect of a transaction with such person if that person was, prior to and independent of the completion of such transaction, retained by written agreement with the issuer to source capital (in the case of a financing transaction) or seek out a buyer/seller of assets or services or perform a similar function (in the case of a non-financing transaction); and
• such other circumstances as may be determined by the TSXV on a case by case basis.  In any event, however, except in the case of an Underwriter Purchase, the TSXV will not accept the payment of any such commission or finder’s fee if it would cause the net amount being paid by the person for the securities it receives under the transaction to be less than the applicable minimum issue price permitted by TSXV policies.

3.    Commission Limitations

The TSXV does not prescribe limits on the cash component of any commission or other form of compensation (e.g. corporate finance fee, corporate advisory fee, etc.) payable by an issuer in respect of a financing transaction.  However, Policy 5.1 has been amended to require that if a commission (or other form of compensation) payable by an issuer in respect of a financing includes shares or warrants, the aggregate value of the shares and warrants cannot exceed 12.5% of the gross proceeds of the financing.  For these purposes, each warrant will have a deemed value of one-half of the value attributed to a share.

Other Noteworthy Amendments

The amendments to Policy 5.1 also clarify the following:

• Although the TSXV does not prescribe any specific limits for interest rates on loans to an issuer or debt instruments issued by an issuer, the TSXV expects and requires that any such interest will be at a commercially reasonable rate taking into consideration the circumstances of the issuer and the risks to the lender.  The TSXV may, at its discretion, request the issuer to provide satisfactory analysis of the reasonableness of the interest rate.
• An issuer must issue a news release disclosing the particulars of the loan and the proposed loan bonus, including the identity of the lender, identity of any guarantors (if applicable) and the fact that the loan bonus is subject to TSXV approval, prior to providing notice of the transaction to the TSXV.  A news release must be issued no later than immediately following completion of the financing disclosing the particulars of any commissions paid, including the identity of the person receiving the commission.
• In the case of a non-financing transaction, an issuer must issue a news release disclosing the particulars of a proposed finder’s fee and the related transaction, including the identity of the finder and the fact that the finder’s fee is subject to TSXV approval, prior to providing notice of the transaction to the TSXV.
• An issuer must give advance notice to the TSXV of any proposed finder’s fee or commission, and the issuer must receive TSXV acceptance of the finder’s fee or commission and the related transaction prior to payment of the finder’s fee or commission, unless: (i) the finder is not a non-arm’s length party of the issuer; (ii) the finder’s fee or commission is payable in cash only; (iii) in the case of a finder’s fee, the amount of the fee is in compliance with the limitations set out in Section 3.3 of Policy 5.1; and (iv) the transaction is one that does not require TSXV acceptance (such as an exempt transaction under TSXV Policy 5.3 – Acquisitions and Dispositions of Non-Cash Assets).

Conclusion

In the context of debt financings in particular, lenders and issuers alike are encouraged to review the requirements and limitations in Policy 5.1 when structuring a deal in view of the increased disclosure requirements in respect of the terms and conditions of the transaction and the new limitations on compensation paid by an issuer to a lender in the form of bonus shares, bonus warrants or commissions/fees payable in shares or warrants.

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.