Look Before You List: TSX Issues New Guidance to Listing Applicants 

publication 

November 2013

Securities Bulletin

The Toronto Stock Exchange (TSX) recently issued Staff Notice #2013-0003 providing guidance to companies applying to list on the TSX. To aid listing applicants, this article provides a brief summary of the following topics covered in the Staff Notice: (i) the limits of pricing stock options granted prior to an issuer's initial public offering (IPO); (ii) the meaning of "economically interesting grades" within the original listing requirements for companies seeking to list under the mineral exploration and development-stage category; and, (iii) the supporting financial statements submitted with a TSX application. Companies seeking to list should be aware of these updates and consider how the Staff Notice affects their listing applications.

Clear guidance on stock option pricing

The TSX restricts stock option grants with an exercise price below the underlying securities' market price at the time the option is granted. For an IPO, the TSX considers market price to be the applicable securities' offering price. In the Staff Notice, the TSX clarifies that stock options granted within three months prior to filing a preliminary prospectus must be priced at or above the offering price. The TSX explains it will require issuers that grant options within this window and priced below the offering price to cancel, forfeit, or re-price the offering price as a condition of listing. Notwithstanding the offering price, the TSX staff may consider accepting options with an exercise price not lower than the price the relevant securities were issued at pursuant to a recent material financing to arm's length parties.

Infrastructure may be important to satisfy an advanced property requirement

The TSX requires a company intending to list under the mineral exploration and development-stage category to have an Advanced Property, which is one where the continuity of mineralization is demonstrated in three dimensions at "economically interesting grades." In its Staff Notice, the TSX explains that in certain situations infrastructure will be a particularly important factor in determining whether a project qualifies as an Advanced Property. Listing applicants with projects located in remote or isolated areas without ready access, particularly those dealing in bulk commodities, should provide a plan and cost estimate to develop or gain necessary road, railway, or port access.

The TSX will assess the reasonableness of the plan, taking into consideration: (i) whether infrastructure has been built over similar terrain and circumstances in the past and the associated building costs; (ii) whether the infrastructure will be unconventional; and, (iii) the assumptions in respect of funding the infrastructure, specifically whether the listing applicant will fund itself or rely on a third party. Infrastructure will not be a material consideration for commodities that can be produced on site, are easily transportable, and have a high value relative to their weight (for example: gold and diamonds).

Further, the TSX provides that a remote or isolated property with a Mineral Reserve or Mineral Resource will qualify as an Advanced Property; however, infrastructure will remain an important factor that the applicant must demonstrate in at least a Preliminary Feasibility Study. Finally, a property with neither a Mineral Reserve or Mineral Resource may still qualify as an Advanced Property where infrastructure and other material considerations do not impede the project's economic viability. Projects with historical resources or new discoveries or interpretations with proof of geological continuity may qualify on this basis.

The TSX may consider or require further financial information

The TSX generally relies on publicly filed financial statements in its assessment of an applicant's suitability to list; however, TSX staff may require and consider further financial information in three areas.

1.    Audited forecast financial statements

An issuer that is not currently profitable but expects to be may apply to list with the TSX's forecasting profitability category. Under this category, the issuer must establish it meets the net tangible asset, earnings, and cash flow tests for the current or next fiscal year. Proof must come in the form of a complete set of financial statements accompanied by a qualified independent auditor's opinion for future oriented financial information. If the auditor's opinion is neither publicly disclosed nor subject to Part 4B of National Instrument (NI) 51-102 Continuous Disclosure Obligations, a sponsor must review and comment on the forecast and future oriented financial information included in the listing application.

2.    Pro forma financial statements

The Staff Notice advises that TSX staff may make or require further adjustments to a listing applicant's pro forma financial statements to adequately reflect a significant transaction and satisfy TSX listing requirements. Further, a sponsor or auditor may be required to comment or provide comfort where the TSX relies on financial statements that are not publicly available.

3.    Accounting standards

In addition to financial statements prepared in accordance with International Financial Reporting Standards (IFRS) the TSX clarified it will accept statements prepared pursuant to US Generally Accepted Accounting Principles (GAAP) for SEC Issuers currently or preparing to file statements in Canada under NI 52-107 Acceptable Accounting Principles and Auditing Standards. TSX staff may accept statements prepared under other jurisdictions' GAAP after considering several factors, including: whether the applicant is from a "designated foreign jurisdiction" or an "SEC foreign issuer" as defined in NI 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. Again, the TSX may require a submission from the applicant's auditor or sponsor in support of such financial statements.

Understanding the TSX's most recent guidance is integral for companies preparing to list with the TSX. Please review the Staff Notice and seek further guidance in preparing a listing application that best demonstrates that your company meets the TSX's original listing requirements.



A cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013