CSE Participates in Successful Effort to Maintain Early Warning Threshold for Public Companies
The Canadian Securities Exchange (CSE) is pleased to report that efforts by the CSE, multiple CSE issuers, investment dealers and investors were successful in influencing the outcome of the Canadian Securities Administrators’ (CSA) proposals to significantly amend the “early warning” reporting protocol.
In March 2013, the CSA published for comment proposed changes to the protocol that would have made disclosure from a security owner mandatory upon reaching an ownership level of 5% (down from 10%) of a public company. The principal rationale underlying the proposed change was to achieve regulatory harmony with the United States and the United Kingdom.
The CSE immediately heard a number of concerns from the early stage capital community and participated in an industry-wide effort to make regulators aware of issues with the proposal. The concerns included:
- Institutional investors and other large shareholders tend to purchase only up to the limit of the 10% threshold to avoid the burden of filing early warning reports. Reducing the threshold to 5% could have resulted in the sale of half of each such position, and put enormous downward pressure on the share prices of many companies;
- Requiring early warning reports to be filed at a 5% ownership level would effectively double the market capitalization threshold for institutions looking to allocate a meaningful percentage of a portfolio to a given security, thus cutting many small companies off from an extremely important source of capital;
- Numerous public companies had expressed similar concerns to CSE representatives, fearing large amounts of forced selling and lamenting the potential introduction of a highly unwelcome new barrier for institutional investors to deploy capital into their companies;
- Attempts from regulators to provide relief from filing reports where the intention of the investment is “passive” are not effective. In any small company, an institutional investor holding close to 10% of the company’s shares is likely to engage with the management team regarding business plans, capital raising efforts and significant transactions.
The CSE and many of its issuers, investment dealers and investors commented that a 5% threshold was simply not appropriate for small capitalization companies, and recommended that the 10% threshold be maintained.
When the final amendments were announced on February 25, for implementation on May 9 (except in Ontario, where the changes will be effective with legislative passage of the Budget Measures Act), the reporting threshold had been maintained at 10%. In addition, a proposal for derivatives to be included in the ownership calculation was not adopted. The final measures include:
- Security-holders subject to reporting will be required to disclose decreases in ownership, control or direction of 2% of more;
- Security-holders subject to reporting will be required to disclose if a position of ownership, control or direction falls below the 10% threshold;
- A greater level of detail will be required from filers of early warning reports regarding the purpose of their transaction and their future intentions.
The CSE’s activity on the early warning issue is one of a number of initiatives currently underway to strengthen the exchange’s offerings for entrepreneurs seeking growth capital from the Canadian public equity markets. The CSE recently published for public comment proposed changes to its initial and continuing listings standards. These measures are intended to increase investor confidence in CSE-listed issuers by strengthening the requirements for companies to become and stay listed on the exchange. More information about the proposals may be found here: http://thecse.com/en/about/publications/cse-news/cse-strengthens-investor-protection-through-enhanced-initial-and-continued-listing-requirements
“The final set of amendments to the early warning rules represents the best outcome for all participants in the financial markets,” said Richard Carleton, CEO of the Canadian Securities Exchange. “The amendments significantly enhance the quality of disclosure required by large investors in public companies without adversely influencing the ability of markets to function efficiently or of smaller companies to obtain support from large pools of capital. We are pleased to have been part of this broad and successful industry effort.”
The full text of the CSE comments can be read here:
About the Canadian Securities Exchange:
The Canadian Securities Exchange is the only exchange in Canada providing trading and market information services for all domestically listed instruments. Recognized as an exchange by the Ontario Securities Commission in 2004, the CSE is designed to facilitate the capital formation process for public companies through a streamlined approach to company regulation that emphasizes disclosure and the provision of efficient secondary market trading services for investors. The exchange is home to more than 300 issues covering a broad range of industry sectors.