Written by James A. Clare and Christopher J. Doucet
On December 17, 2015, the TSX Venture Exchange (TSXV or the Exchange) published a White Paper on its proposed broad-based reforms to various TSXV rules, policies and strategies aimed at fostering renewed interest in the Exchange and its services in the wake of ongoing sluggish capital markets conditions for junior issuers. The White Paper, Revitalizing TSX Venture Exchange: Canada's Public Venture Market, was the result of a lengthy consultative process, during which more than 130 clients and key stakeholders from many of the TSXV's most important industry sectors (including natural resource, science and technology and financial services) provided feedback to the Exchange that was then examined by various advisory committees across Canada. The White Paper synthesizes their recommendations into a three-pronged strategic reform program aimed at: (1) reducing the financial burden of compliance for listed issuers; (2) attracting new and more diverse capital to the Exchange; and (3) broadening and diversifying the base of listed issuers on the Exchange. The proposed initiatives within each prong range from general to specific and from conceptual to technical, but the TSXV has indicated its intention to implement these initiatives on an "aggressive timeline", subject in certain cases to regulatory approval.
Cost of Compliance
The White Paper identified the financial requirements of ongoing compliance with Exchange rules as a key growth constraint for existing listed issuers in difficult market conditions. While many of the compliance obligations derive from securities laws applicable to venture companies, as opposed to from the Exchange itself, the perception that the red tape of audit compliance, resource sector compliance (such as technical reports in the mineral and oil and gas sector) and general disclosure compliance is too burdensome may be slowing the growth of listed issuers and discouraging potential Exchange clients from seeking a listing in the first place. To combat this perception and to ease the financial burden on junior issuers, the Exchange proposes to implement a series of rule changes, many of which will require significant amendments to the TSX Venture Exchange Corporate Finance Manual, including:
- Eliminating the general requirement for sponsorship of new issuers or issuers undertaking a reverse-takeover (RTO), change of business (COB) or other business combination;
- Narrowing the application of shareholder approval requirements for inactive issuers undertaking an RTO or COB;
- Implementing a director and officer NEXUS-type status certification program to reduce or eliminate ongoing requirements for certain established and proven individuals and extending the shelf life of on-file personal information forms for directors and officers from three to five years;
- Eliminating escrow requirements that overlapped with similar requirements of the Canadian Securities Administrators, and which in certain cases could be more onerous; and
- Implementing an automated system for transaction filing and accelerating response times to speed up overall transaction processing, including a commitment to provide comments on filings within a specified number of days.
By implementing the initiatives listed above, the TSXV hopes to meaningfully reduce the cost of compliance for existing and potential issuers and change the perception that such costs are too restrictive for market participants and new entrants. At the same time, the Exchange is not of the view that the reforms are so dramatic as to undermine the Exchange's reputation for credibility and market integrity that is essential to the other two prongs of the White Paper strategy.
Bringing the Brokers
The White Paper notes that the flow of capital to early-stage public issuers has been noticeably reduced in recent years, both due to market trends, such as sector rotation away from areas in which Exchange listings have historically been concentrated, as well as shifts in strategy within the investment brokerage and securities dealer community. While the Exchange is keen to highlight the number of TSXV graduates that subsequently list on the Toronto Stock Exchange and become mature public companies with fully-developed capital structures as a means of downplaying the speculative component of public venture capital, the White Paper does grant that strategic measures are needed to restore and bolster interest in TSXV-listed issuers within the investment community. Though the initiatives proposed are less technical and less defined than the proposed compliance policy changes noted above, the Exchange has proposed:
- Undertaking active and ongoing promotion of TSXV-listed issuers through roadshow presentations to fund managers, retail investors, investment advisors and bankers and research analysts and instituting an ongoing streaming summary service of available public offerings;
- Introducing an new market making program to be administered by the Exchange;
- Advocating for securities law reform to increase the number of available prospectus exemptions and lower the regulatory barriers to United States investors participating in the Canadian public venture market;
- Introducing new research products aimed at providing information to potential investors about Exchange issuers that are typically too small to be covered by traditional research analysts; and
- Investing in financial literacy at the post-secondary level.
The proposals above are a mix of concrete and more conceptual initiatives and, particularly in the case of investing in new research products and financial literacy education, the results and benefits are likely to be borne out over a much longer period of time, but the TSXV hopes that they will serve to position the Exchange as an attractive destination for capital in a wider segment of the investing community.
Problem of Perception
The third prong of the White Paper's strategy is to increase the number of Exchange issuers by combating the perception that the TSXV is primarily a natural resources-focused market and promoting its services across a wider array of industries. While maintaining its reputation as the premier market for junior mining and junior oil and gas issuers, the TSXV seeks to broaden its client base by:
- Implementing changes to the Capital Pool Company (CPC) program to widen its usage to a broader set of industries and build on the success of the almost 30 percent of listed graduates that are former CPCs;
- Showcasing the TSXV amongst the private venture capital community, including VCs and other late stage private equity investors to promote a listing as a viable exit strategy;
- Building partnerships with other exchanges to expand the international reach of listed issuers and promote long-term liquidity;
- Exploring the creation of TSXV-specific basket products such as ETFs to foster investment in junior issuers with more diversification and less risk; and
- Advocating for tax reform to allow early stage public issuers to become eligible for Scientific Research & Experimental Development tax credits in the same way private companies of similar development are.
The proposed initiatives clearly express the Exchange's desire to expand its client base primarily into the innovation, science and technology sector, where private capital currently dominates the investment landscape. Nearly 500 non-resource companies currently list on the TSXV and the growth of this figure in the medium term is likely to be a key metric of success for this third prong.
The Exchange has yet to propose any specific rule changes or publish any specific amendments, draft policies or program guidelines, however it is likely that many of these will be seen following a series of town hall meetings the Exchange proposes to host in the early part of 2016, at which the Exchange will entertain feedback on the White Paper's strategy and proposed initiatives. Existing issuers and those other stakeholders who stand to benefit significantly from these reforms should continue to monitor these developments in the coming months.