Effective April 3, 2023, the Canadian Securities Exchange (the “CSE”) implemented comprehensive changes (the “Amendments”) to its policies (the “Policies”).
The Amendments include extensive housekeeping and consequential revisions that may result in significant changes to how new issuers are listed and how currently listed issuers undertake transaction that fall within the CSE’s purview business. While the Amendments feature changes to each of the CSE’s 10 policies, the most comprehensive changes are in CSE Policy 2 – Qualification for Listing (“Policy 2”), CSE Policy 4 – Corporate Governance and Miscellaneous Provisions (“Policy 4”) and CSE Policy 6 – Distributions (“Policy 6”).
This article will focus on the more substantive changes to Policy 2. Subsequent articles will outline the most considerable changes to Policy 4 and Policy 6.
Policy 2 – Qualification for Listing
Policy 2 outlines the initial listing requirements that an issuer seeking a listing on the CSE must meet. The Amendments have introduced significant changes to initial listing requirements, including expanding the scope of existing listing requirements and adopting new listing requirements that are primarily aimed at promoting transparency, improving corporate governance and protecting investors.
Pre-filing eligibility review
Under the revised Policy 2, an issuer intending to apply for listing concurrently with or immediately following the filing of a preliminary prospectus must first receive confirmation from the CSE that the eligibility requirements have been met. The issuer will seek such confirmation during the course of an eligibility review, which will require an issuers to provide detailed disclosure on its business, including the nature of its operations, management and material agreements. The CSE has indicated that a draft prospectus — and in the case of natural resources and mining issuers, the relevant technical report — can be submitted as the required documents for the CSE’s review. The review is designed to identify any potential issues or concerns with an issuer’s business that may impact its ability to list on the CSE. This review will carry a fee, which will be applied to the non-refundable portion of the listing fee.
Natural resources companies
The CSE adopted stricter listing requirements for mineral exploration companies iunder the revised Policy 2. A mineral exploration company must have at least $150,000 of qualifying expenditures in the most recent 36 months. Therevised policy has removed the ability for these qualifying expenditures to have been incurred by a “predecessor” – the issuer itself must now have incurred the expenditures. In addition, the minimum first phase exploration budget as recommended by an independent report that meets the requirements of National Instrument 43-101 – Standard of Disclosure for Mineral Projects has been increased to at least $250,000. In addition, ff the issuer intends to meet minimum listing requirements with a single exploration project, it must disclose its objectives to pursue additional exploration projects or opportunities to otherwise remain in the mineral exploration business. Notwithstanding the foregoing, the revised Policy 2 permits an issuer to list by meeting reduced qualifying expenditure and first phase exploration requirements provided the issuer agrees to an enhanced escrow regime.
NV Issuers
The CSE has introduced a new tier of issuers in its revised policies: non-venture issuers (“NV Issuers”). In addition to meeting the CSE basic listing qualifications, NV Issuers must meet one of four elevated listing standards as well as increased public distribution standards, among other requirements. Each of the four standards set minimum thresholds with respect to equity, net income, market value, or assets and revenue.
Equity standard
Shareholders’ equity of at least $5 million and a public float with an expected market value of at least $10 million.
Net income standard
Net income of at least $400,000 from continuing operations in the most recent fiscal year or two of the three most recent fiscal years, shareholder equity of at least $2.5 million and a public float with an expected market value of at least $5 million.
Market value standard
Market value of all securities (excluding warrants and options) of at least $50 million, shareholders’ equity of at least $2.5 million including the value of any offering concurrent with listing, and a public float with an expected market value of at least $10 million.
Asset and revenue standard
Assets and revenue of at least $50 million each in the most recent fiscal year or in two of the three most recent fiscal years and a public float with an expected market value of at least $5 million will satisfy the asset and revenue standard.
NV Issuers under CSE policies will continue to be considered venture issuers under securities laws; however, pursuant to CSE policies, they are subject to additional disclosure requirements, including the requirement to post an annual information form pursuant to Form 51-102F2 – Annual Information Form, and shorter filing deadlines for annual and interim financial statements.
Additionally, NV Issuers completing an initial public offering (IPO) may not sell securities for less than $2 per unit, as compared to a minimum unit price of $0.10 for other issuers.
SPACs
Special purpose acquisition corporations (SPACs) seek to acquire qualifying businesses, similar to how capital pool companies operate on the TSX Venture Exchange. In recent years, SPACs have become a popular vehicle for raising capital and completing mergers and acquisitions. The revised CSE policies have introduced new listing requirements for SPACs seeking to list on the CSE.
SPACs must meet the following minimum listing requirements:
- Public float: public float of at least 150 shareholders, each holding at least one board lot.
- Capitalization: minimum market capitalization of $30 million.
- Pricing: The minimum IPO price for a SPAC is $2 per share or unit.
- Escrow requirements: Ninety percent of the gross proceeds from the IPO and the underwriter’s deferred commissions must be placed in escrow until the completion of the qualifying acquisition.
- Qualifying acquisition: must complete a qualifying acquisition within 36 months of the date of listing. The qualifying acquisition must meet certain minimum requirements, including a minimum acquisition value of $30 million, filing of a prospectus, meeting minimum CSE listing requirements for a NV Issuer and the completion of a shareholder vote. A SPAC is not permitted to adopt a security-based compensation arrangement prior to the completion of its qualifying acquisition.
It is important to note that these requirements are in addition to other listing requirements set by the CSE, such as the requirement for disclosure, corporate governance and regulatory oversight.
Float and distribution requirements
Policy 2 clarifies that “public holders” are securityholders other than a related person, an employee of a related person of the issuer or any person or group of persons acting jointly or in concert holding: (a) more than 10% (increased from 5%) of the issued and outstanding securities of the class of securities to be listed, or (b) securities convertible or exchangeable into the listed equity security that would, on conversion or exchange, hold more than 10% (up from 5%) of the issued and outstanding securities of the class to be listed.
An issuer of equity securities must have at least 1 million (up from 500,000) freely tradeable shares with at least 150 public holders holding a board lot each of the security. The public float must constitute at least 20% (up from 10%) of the total issued and outstanding listed securities. NV Issuers will face a higher standard, which requires them to have at least 300 public holders each holding a board lot. The new NV Issuer public float requirements also apply to closed end funds, ETFs and structured products.
Conduct of related persons and IR personnel
Under the new Policy 2, the CSE has imposed certain requirements on the background of related persons or investor relations personnel. Issuers with related persons or investor relations personnel who have been convicted of fraud, found liable of a breach of fiduciary duty, sanctioned pursuant to the violations of securities laws or any other activity that concerns integrity of conduct may not be approved for listing unless the issuer severs the relationship with such person(s) to the satisfaction of the CSE. Furthermore, the CSE indicates that it may not approve listings if there are related persons or investor relations personnel associated with the issuer who have entered into a settlement agreement with a securities regulator or other authority, are known to be associated with offenders or have a consistent record of business failures, particularly failures involving public companies, unless the issuer first severs relations with such person(s) to the satisfaction of the CSE.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.