TSX Venture Exchange Updates Escrow Policy for New Listings

Written By Andrew Disipio, Steven Bodi, Jeff Taylor and Jennifer Huang

The TSX Venture Exchange (TSXV) has announced updates to its policy on escrow and resale restrictions. The immediately effective updates amended and renamed Policy 5.4 – Capital Structure, Escrow and Resale Restrictions (New Policy 5.4), which applies to new listings on the TSXV (New Listings), which include initial public offerings (IPOs), reverse takeovers (RTOs), changes of business (COBs) and qualifying transactions (QTs).

Significant updates include:

1. Expanding ways to demonstrate acceptable capital structure: The New Policy 5.4 provides more ways for an issuer to demonstrate acceptable capital structure when seeking approval for a New Listing.
2. Eliminating the delayed escrow release schedule for Surplus Securities held by principals: Under the New Policy 5.4 principals' securities will be escrowed and released consistent with the release schedules set out in NP 46-201 – Escrow for Initial Public Offerings (NP 46-201). This does not change the overall duration of the escrow release but removes the prior differences in weighting of the release throughout the term based on valuation of the securities.
3. Simplifying the seed share resale restrictions (SSRRs): The New Policy 5.4 simplifies the resale restrictions for seed shares held by non-principals. Securities subject to SSRRs will have a hold period of one year, with 20 percent released every three months starting from the date the TSXV issues its bulletin confirming final acceptance of the New Listing transaction (Bulletin Date).

TSXV New Policy 5.4

Expanding Ways to Demonstrate Acceptable Capital Structure

New Policy 5.4 illustrates different ways for an issuer to demonstrate acceptable capital structure to the TSXV when seeking approval for a New Listing:

• Contemporaneous equity financing: Involving the issuance of at least 10 percent of issued and outstanding shares or C$5M gross proceeds.
• Appraisal or valuation: A report prepared by a prescribed appraiser which supports at least 50 percent of the consideration.
• Expenditures: For an asset, incurred within the last five years and supporting at least 50 percent of the consideration.
• Net tangible assets of the target company: Equal to at least 50 percent of the consideration.
• Operating cash flow of the target company: 10x the average annual cash flows from operations before working capital adjustments, equal to at least 50 percent of the consideration.
• Securities issued by the target company: At least 50 percent of outstanding equity securities of the target company issued (1) at or above prices that would constitute the discounted market price of the issuer's shares or (2) at prices that are at least 50 percent of the current market price of the issuer's shares and issued at least twelve months before a news release announcing the New Listing transaction.
• Current listing: The issuer has been listed and trading on a recognized stock exchange for at least one year (and has completed no reverse takeover, qualifying transaction, change of business, or similar transaction in that period).
• Initial public offering: The New Listing involves an IPO that includes a financing.

Each of the above methods includes specific additional criteria, adjustments or exclusions as set out under New Policy 5.4.

If an issuer is unable to demonstrate an acceptable capital structure in one of the ways set out under New Policy 5.4, the issuer is also able to request a pre-filing conference to discuss alternatives with the TSXV.

Eliminating the Delayed Escrow Release Schedule for Surplus Securities Held by Principals

A significant update in New Policy 5.4 is the elimination of the bifurcated escrow release schedule for securities held by principals of the issuer based on underlying consideration received for the securities.

Previously, the TSXV imposed a delayed release schedule for Surplus Securities—generally, securities issued with a deemed value that does not reasonably correspond to the value of the asset, property, business, indebtedness, or service for which they were issued—in connection with New Listings that are not IPOs. In contrast, Value Securities—generally, securities issued pursuant to a transaction with a deemed value that reasonably corresponds to the value of the asset, property, business, indebtedness or service for which they were issued—followed the NP 46-201 release schedule. New Listings that were IPOs also followed the NP 46-201 escrow requirements.

Under the New Policy 5.4, unless an exemption applies, all principals' securities will be escrowed and released consistent with the escrow release schedules set out in NP 46-201, being: (1) eighteen months for established issuers (or TSXV Tier 1 issuers), or (2) three years for emerging issuers (or TSXV Tier 2 issuers):

The elimination of the Surplus Security concept does not change the overall duration of the escrow release but removes the prior differences in release percentages throughout the term based on valuation of the securities.

Principals' securities include securities outstanding upon completion of a New Listing transaction, those that will be issued subsequently in connection with a New Listing transaction, and securities transferred from a principal within six months before a listing application.

Simplifying the Seed Share Resale Restrictions

New Policy 5.4 also simplifies the hold period restrictions for seed shares (securities issued before a New Listing) held by non-principals.

Unless an exemption applies, securities will be subject to SSRRs if they were issued or are convertible at:

• less than the lesser of C$0.05 and 50 percent of the Transaction Price (as defined under New Policy 5.4);
• less than 25 percent of the Transaction Price, if issued within twelve months before the TSXV conditional acceptance of the transaction; or
• less than 50 percent of the Transaction Price, if issued within three months before the TSXV conditional acceptance of the transaction.

Securities subject to the SSRRs will have a hold period of one year, with 20 percent being released every three months starting from the Bulletin Date.

The issuer is required to either legend the certificates representing securities subject to SSRRs or require holders of securities subject to SSRRs to enter into a pooling agreement with the issuer's transfer agent which contains such restrictions.

Comparison to CSE Policies

Acceptable Capital Structure

The Canadian Securities Exchange (CSE) requires an issuer's capital structure to be acceptable to the CSE under CSE Policy 2–Qualifications for Listing (CSE Policy 2) as a prerequisite to listing its securities on the CSE but does not provide the same illustrative categories as under TSXV New Policy 5.4.

Escrow Release for Securities Held by Principals

The CSE generally requires securities issued to Related Persons (an equivalent concept to principals under TSXV policies) to be subject to an escrow agreement under NP 46-201. Generally, the same release schedules under NP 46-201 would apply as for securities held by principals under the TSXV.

Seed Share Restrictions for Non-Principals

The CSE prescribes certain requirements for 'builder shares', which are generally securities issued or convertible at less than C$0.02 per security, or to related persons in certain circumstances involving valuation concerns. This is similar to the concept of seed shares under the TSXV, but is a narrower concept tied to valuation rather than valuation and time of issuance.

Unlike the TSXV's SSRRs, the CSE does not prescribe equivalent resale restrictions for builder shares. CSE rules around builder shares relate to permitted capital structure. CSE Policy 2 restricts the ratio of builder shares permitted in the capital structure of an issuer undergoing a new listing or following a fundamental change.

Builder shares under the CSE may be subject to escrow in a narrow issuer category, for mineral exploration companies approved for listing with reduced minimum amounts for qualifying expenditures and a first phase budget. In this scenario, the initial release from escrow is subject to CSE approval but must be after public announcement of the results of the first phase exploration program.

Key Takeaways

TSXV New Policy 5.4 provides issuers with greater clarity for demonstrating an acceptable capital structure for a New Listing and streamlines the escrow release schedule for principals' securities and the resale restrictions for seed shares held by non-principals.

Bennett Jones is available to assist clients with any questions related to New Policy 5.4 and listing on the TSXV or the CSE.

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