Notice of Approval - CNSX Markets Inc.

Market Regulation Document Type
Canadian Securities Exchange (CSE) rule review and notices




In accordance with the process set out in the Process for the Review and Approval of Rules and the Information Contained in Form 21-101F1 and the Exhibits Thereto, CNSX Markets Inc. (CSE) filed, and the OSC approved, amendments to Policy 2 Qualifications for Listing and Policy 8 Fundamental Changes (the Amendments).

The Amendments relate to enhancements to the minimum requirements that must be met as a pre-requisite of listing securities on the CSE and to the requirements for companies undergoing fundamental changes.

The Amendments were published for comment on February 25, 2016 for 30 days. Two comments were received, from AFG Law Corporation LLP (AFG) and from Genesis Law Corporation (Genesis). A summary of comments and the CSE's response follows.



CSE Response



AFG: "We are pleased with the Proposed Amendments and we believe that as a whole they will: provide increased guidance to potential issuers and current issuers; promote market integrity by raising standards and carving out problematic portions of certain provisions; and maintaining a principled approach and the discretion of the CSE with respect to certain requirements, indicating that the CSE recognizes that the rigidity of absolute thresholds can at times create gaps and loopholes whereas discretion encourages transparency and maintains balance."

CSE agrees with the comment.


Appendix A: Equity Securities -- Eligibility for Listing

AFG: "We appreciate the clarity and simplicity of this amendment. This section encourages management to spend more time developing their early stage company prior to listing while granting the CSE more discretion to allow or disallow early stage listings."

CSE agrees with the comment.

1.1 Business Development Prior to Listing




Appendix A: Equity Securities -- Eligibility for Listing

AFG: "We strongly approve of and support this proposed amendment or the reason that gives the CSE discretion to allow or disallow certain listings whether or not they meet the minimum float amount, which is problematic for the reason that a minimum float threshold can be potentially vulnerable to manipulation in order to achieve the threshold. For example, if most of the money is raised at $0.02 per share, then a small percentage is raised at $0.10 per share, then the float amount will be increased because all of the $0.02 shares are not worth $0.10 per share."

The comments reinforce the CSE's position with respect to a bright line test for the value and structure of the public float.

1.2 Float and Distribution




1.2.2 of Appendix A

Genesis: "The use of the word "may" could give some issuers the impression that there are circumstances where an issuer could meet the initial listing requirements via the gifting of shares including, potentially, situations where a significant number of the issuer's shareholders received shares a gift. Recommend additional language: " <<The Exchange will not consider the public float requirement to have been met where a substantial number of the issuer's shareholders obtained their shares as a gift.">>

An issuer could have a substantial number of shareholders that received gifted shares yet still meet the requirement with 150 public holders resulting from a public offering. The intention was to provide examples of shareholdings that maybe excluded from the public float calculation, rather than stipulate that the overall requirement had not been met if such holdings existed. The full proposed text of the section does include specific restrictions:

"The Exchange may not consider as part of the public float any shares that were obtained in a distribution that was primarily effected as a gift or through an arrangement primarily designed for the purpose of meeting the Exchange float distribution requirement. [emphasis added]"


"The public distribution requirement will not be met if a significant number of the public securityholders:



a) did not purchase the shares directly or receive the shares in exchange for previously purchased shares of another issuer;..."


1.2.2 of Appendix A

Genesis: "Our second concern is with the mechanisms currently available to issuers to meet the 150/200 public shareholders requirement. For most IPO issuers, getting the required shareholder base is a very significant challenge. Issuers generally have three options<<:>>

The lack of a reasonable shareholder base often results in a lack of liquidity. In turn, the lack of liquidity creates significant challenges to listed companies trying to find new capital. A company that struggles to meet the minimum financial or shareholder requirements may have chosen the wrong time, either in its own development stage or in the market cycle, to seek a listing.

"The public distribution requirement will not be met if a significant number of the public securityholders:



a) did not purchase the shares directly or receive the shares in exchange for previously purchased shares of another issuer;..."




1. Retain a broker to bring in the shareholders, which typically involves significant corporate finance and legal fees;



2. Conduct an offering memorandum financing, which can be very time consuming; or



3. Merge with another issuer that already has a large shareholder base, which can be dilutive and expensive."




Genesis provided a description of the application of the exemption in section 2.31(2) of NI 45-106 whereby "a corporate shareholder that holds shares in an issuer declares an in specie stock dividend of those shares to its own shareholders.

The CSE would not object to such a distribution, but acceptance would be subject to the same principles that have shaped the requirements. The CSE will retain the discretion to accept or reject certain transactions, and one in which an issuer with ownership or investment in an asset or another issuer that intends to distribute that ownership directly to its shareholders would be acceptable. If, however, an issuer acquires such an interest for the sole purpose of distributing it to shareholders, or an issuer makes a business of such distributions, the resulting business may <<NOT>> be acceptable.


"Given that CSE's philosophy has always been to have "simple and concise policies [that] make it easier for companies to get listed", we submit that CSE retain the discretion to allow issuers to use this approach in certain circumstances, such as if they meet the Substantial Float test.




Genesis suggests the following change:



"The public distribution requirement will <<may>> not be met if a significant number of the public securityholders:



a) did not purchase the shares directly or receive the shares in exchange for previously purchased shares of another issuer; or



b) hold the minimum number of shares described in 1.2.1 above."



1.2.2 Distribution

AFG: We support this amendment as it required most direct investment into the companies and also provides the CSE with discretion.

CSE agrees with the comment.



AFG: We fully support this section for the reason that it discourages potential issuers from applying for listing at a premature stage, requiring adequate working capital, and demonstrating the capacity to secure further financing.

CSE agrees with the comment.


1.6.1 Prior expenditures and work programs

AFG: "...the $75,000 minimum work expenditure creates certainty for issuers in an industry that has faced significant challenges in the past several years, and again, discouraging potential issuers from applying for a listing at a premature stage. We like that this requirement more closely aligns with the similar TSX Venture Exchange requirement.

The CSE agrees that the expenditure creates certainty.


2.5 Substantial Float

Genesis: "...propose that the first sentence in section 2.5 be amended as follows: The Exchange may consider exercising discretion to amend or waive the provisions of paragraphs <<1.2.2,>> 2.3 and 2.4 if an Issuer has a Substantial Float."

It is the intent of 1.2.2 to exclude certain holdings from the calculated public float. If the float meets the substantial float threshold, no waiver would be required.


Policy 8 Fundamental Changes Proposed 1.9 relating to fundamental changes within 12 months of listing.

AFG: We support the requirement regarding majority of the minority approval. This section necessarily makes it more onerous for listed companies to effect a "Fundamental Change" soon after listing on the CSE, thereby discouraging companies with such an intent from applying for listing on the CSE, promoting transparency and market integrity.

CSE agrees with the comment.


It makes it more onerous on companies who wish to complete a Fundamental Change within the first 12 months of listing. Majority of Minority approval should state "in addition to any requirement of MI 61-101, all Related Persons shall be excluded from voting on the Fundamental Change." In most cases, a fundamental change will not trigger MI 61-101.



Additional Comments

AFG: We believe that the annual 2A requirement is not necessary since monthly reports, quarterly reports, quarterly management's discussion and analysis and financial statements, along with continuous disclosure requirements are more than adequate. The annual 2A is unnecessary cost for issuers and does little to benefit investors.

While not specifically relevant to the current proposal, the CSE recognizes that the existing requirement is not necessarily consistent with the "simple and concise" objectives described herein. The CSE will reconsider the utility of the Annual Listing Statement.