Raising new capital in volatile markets is never easy. Issuers are increasingly facing a landscape where debt financing is becoming prevalent and investors are requesting additional compensation, either in the form of bonus shares, warrants or commissions, for the perceived increase in the risk of their investments. Against this background, effective as of Jan. 26, 2015, the TSX Venture Exchange (TSX-V) has released updated versions of Policy 4.1 - Private Placements and Policy 5.1 - Loans, Loan Bonuses, Finder's Fees and Commissions to update the requirements for issuers raising debt or equity capital.
Along with extensive changes to make the policies easier to read and follow, the TSX-V has also included guidance notes to clarify certain existing requirements and provide guidance as to when the TSX-V will consider any variances to its policies. The overall theme of the changes to the policies are to:
- provide enhanced disclosure of proposed financings through mandated disclosure in news releases; and
- offer guidance on the factors the TSX-V considers in evaluating a financing and expanded guidance on filing requirements for conditional or final acceptance of a financing.
Policy 5.1 - Loans, Loan Bonuses, Finder's Fees and Commissions
As more issuers contemplate debt financing in a market where equity financing is scarce, the TSX-V appears to be focussed on increased disclosure of the terms of any debt financing and the terms and conditions of the debt. Key clarifications to the policy include:
- The TSX-V does not prescribe limits for interest rates, but does expect they will be at a commercially reasonable rate taking into consideration the circumstances of the issuer and the risks to the lender.
- The TSX-V may, at its discretion, request an analysis of the reasonableness of the interest rate.
Loan Bonus Disclosure
- An issuer must issue a news release disclosing the particulars of the loan and any proposed loan bonus prior to providing notice of the transaction to the TSX-V.
- The news release must include the identity of the lender, the identity of the guarantor (if applicable) and the fact that the loan bonus is subject to TSX-V acceptance.
- Copies of the relevant agreements need to be filed with the TSX-V with the notice.
Loan Bonus Limits
- Loan bonuses are not permitted for debt that is convertible into listed shares.
- Loan bonuses may be paid in the form of listed shares, warrants or a combination of both.
- Limit on listed shares and warrants is now calculated based on the Market Price rather than Discounted Market Price.
- If a loan bonus is comprised of listed shares only, the maximum number of listed shares that may be issued as a bonus is 20% of the total dollar value of the loan/guarantee divided by the Market Price (as defined by the TSX-V).
- Bonus shares are generally not permitted on loans with a term of less than one year but the TSX-V may exercise its discretion (see below).
- 100% warrant coverage is now permitted if a loan bonus is comprised solely of warrants.
- The maximum number of warrants that may be issued is equal to the total dollar amount of the loan/guarantee divided by the Market Price.
- Warrants are permitted on loans with a term of less than one year.
- For loans greater than one year, the number of warrants issued may be reduced if the underlying loan is repaid or reduced during the first year.
Bonus Shares and Warrants
- If a loan bonus is a combination of listed shares and warrants, the limits still apply on the maximum number of listed shares and warrants with one listed share being treated as equivalent to five warrants (and vice versa).
Guidance on TSX-V Discretion
- There is some discretion with respect to both the requirement that (i) the ability of the issuer to repay the loan not be evident; and (ii) the requirement that a bonus of listed shares is not permitted on loans having a term of less than one year. In exercising its discretion, in addition to such other conditions as the TSX-V may consider necessary or desirable in the circumstances, the TSX-V must be satisfied that:
- the lender is in the business of making commercial loans;
- the lender is an arm's length party; and
- the issuer confirms that the funds are required and the loan cannot be secured without the issuance of the loan bonus.
Finder's Fees and Commissions
- Advance notice of any proposed finder's fees or commissions is required along with copies of the relevant agreements.
- In a financing transaction, a news release disclosing the particulars of any finder's fees or commissions must be issued immediately following completion of the financing.
- The news release must include the identity of the person receiving the commission.
- Notice to the TSX-V or acceptance of any finder's fee or commission payable to a person in respect of a transaction is not required if:
- the person is not a Non-Arm's Length Party (as defined by the TSX-V) of the issuer;
- the finder's fee or commission is payable in cash only;
- in the case of a finder's fee, the amount is in compliance with the limitations in the policy; and
- the transaction is one that does not require TSX-V acceptance (such as an exempt transaction under Policy 5.3 - Acquisitions and Dispositions of Non-Cash Assets).
Limits on Finder's Fees and Commissions
- The TSX-V does not prescribe limits on cash commissions being paid in respect of a financing transaction, however, it does require that if a commission (or other form of compensation) payable by an issuer in respect of a financing includes listed share or warrants, the aggregate value of the shares and warrants not exceed 12.5% of the gross proceeds of the financing.
Policy 4.1 - Private Placements
The revised policy includes substantial clarification on the process of providing notice to the TSX-V for conditional and final acceptance of private placements. The other substantial revisions include:
Expanded Definition of Private Placement
- An issuer's sale for cash of any of its previously issued listed shares that were purchased or otherwise acquired by the issuer will be treated as a private placement and will be subject to the policy.
- A transaction, or series of transactions, that has the effect of directly or indirectly financing an issuer in exchange for the direct or indirect issuance of securities may be treated as a private placement.
- Notwithstanding that an issuer has reserved the proposed offering price (or Conversion Price (as defined by the TSX-V)) in accordance with the policy requirements, the proposed offering price (or Conversion Price) is subject to TSX-V acceptance.
- Assessing the acceptability of the proposed offering price (or Conversion Price) will form a material component of the TSX-V's review of a private placement and will take into consideration the minimum pricing requirements set out in the policy, among other things.
- The initial news release announcing the private placement must now also include the intended principal uses of the proceeds.
- News releases must also be issued upon the TSX-V granting an extension outside of the timeframes set out in the policy and upon the closing of each tranche of a private placement.
Amendment to Convertible Securities
- All amendments to convertible securities must be approved by the TSX-V.
Amendments to Warrants
- Any amendment of warrant terms is subject to TSX-V acceptance.
- An issuer must issue a news release disclosing its intent to amend its warrants, particulars of the proposed amendments and the fact that the amendments are subject to TSX-V acceptance.
Finder's Fee or Commission Agreements
- All agreements related to finder's fees or commissions payable by the issuer in respect of a private placement must be filed with the TSX-V prior to the TSX-V issuing final approval.