Notice 2023-006 - Guidance - Public Float and Distribution Requirements for Listing

April 14, 2023

The Canadian Securities Exchange (CSE, or Exchange) is issuing this notice to provide guidance and clarify expectations with respect to the public float and share distribution requirements for issuers listing on the CSE.

Exchange Requirements

The basic requirements are set out in Appendix A to CSE Policy 2 Qualification for Listing.

From 2A.2 Float and Distribution¹:

1. Minimum Float

1. An issuer of Equity Securities must have a Public Float of at least 1,000,000 Freely Tradeable shares and consisting of at least 150 Public Holders holding at least a Board Lot each of the security. The Public Float must constitute at least 20% of the total issued and outstanding of that security.

2. NV Issuer - A Listed Issuer must have: (i) a Public Float of at least 1,000,000 Freely Tradeable securities and (ii) at least 300 Public Holders each holding at least a Board Lot.

3. Closed End Funds, ETFs and Structured Products must meet the minimum float requirements for an NV Issuer.

2. 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 minimum float distribution requirement. The minimum float distribution requirement will not be met if a significant number of the Public security holders:

1. did not purchase the shares directly or received or will receive the shares in exchange for previously purchased shares of another issuer; or

2. hold the minimum number of shares described in s. 2A.2(1) above.

CSE Policy Amendments

On December 9, 2021, CSE published a request for comment² (the “Notice”) on comprehensive significant changes to the Exchange Requirements.  While no specific changes were proposed to the basic float and distribution requirements (the proposed “NV” issuer tier included additional requirements), the Exchange sought specific feedback on the existing requirements³.

Following the publication of the Notice, and in consideration of the comments received and the requirements of other exchanges in Canada, the Exchange determined that changes were appropriate.  The Notice of Approval⁴ provides detail on the following additional amendments:

• The minimum number of free trading securities required in the public float has increased from 500,000 to 1,000,000

• The minimum percentage of outstanding securities held by public holders has increased from 10% to 20%.

Additional Considerations

As indicated in the Notice, CSE continues to review and consider whether simple thresholds adequately address market integrity and market quality concerns associated with inadequate distributions. 

The distribution requirements are intended to foster price discovery and liquidity in the secondary market.  For that to occur, there must be bids and offers sufficient to support a healthy price discovery process.  With a large portion of the shareholder base holding the minimum number of shares, it is unlikely those shares will ever reach the public market, regardless of the number holders.  This can have a significant detrimental impact on liquidity and price volatility.

Reference

In March 2008, the Exchange published guidance⁵ identifying concerns about listing applications by issuers for which a large proportion of the outstanding shares had been issued for nominal consideration.  That notice introduced the concept of Builder Shares, which was subsequently incorporated into CSE Policy.  The prescriptive policy was intended to restrict and discourage certain practices, not to define an acceptable standard with the maximum number of “cheap shares”.  The capital structure of a listed issuer should reflect the development of a business and the capital raises required to pursue that business.

In September 2010, the CSA published Staff Notice 41-305 Share Structure Issues -- Initial Public Offerings to provide additional guidance, noting that while guidance from the CSE and the TSX Venture Exchange had addressed some of the concerns, such structures were still appearing in initial public offerings. 

CSE Guidance

A variety of prospectus-exempt distribution strategies have developed that appear to be solely or primarily intended to meet the specific shareholder distribution requirements for listing, rather than to raise capital necessary pursue business objectives.  The minimum distribution requirements should not be considered an objective, or a “target” capital structure.  The minimum public float and outstanding securities thresholds are not intended to provide a formula for creating a public vehicle.  They are intended to establish one minimum standard in a number of listings standards that demonstrate business development and financial resources and facilitate capital formation, liquidity and price discovery.

The CSE’s continuing evaluation of the adequacy of specific thresholds also extends to certain policies that are prescriptive in nature, such as the CSE concept of Builder Shares. The Builder Share restrictions are intended to achieve a measure of equity between the contributions by Related Persons and those of public investors relative to their ownership positions in the issuer. Strategies designed primarily to satisfy minimum float and distribution requirements or builder share requirements rather than advance the business of an issuer will not be considered adequate for purposes of satisfying those requirements. Further, in this regard, placing additional shares in escrow will not be considered an adequate measure to address an otherwise inequitable capital structure.

In determining whether a public distribution is acceptable the Exchange will not rely solely on these thresholds.  The CSE will continue to consider several factors including:

1. Acceptable capital structure, including:

   • Capital contribution:

   • cash paid in and reasonable value of assets contributed, and services performed,

   • Ratio of capital contribution to ownership by Related Persons

   • Ratio of share price in pre-IPO financing rounds to the IPO (or final round of financing pre-listing) price

2. Number of public holders and average number of shares and value invested. As stated in Policy 2A.2, if a significant number of public security holders hold the minimum number of shares, the minimum distribution requirement will not be met.

3. Suitability of all issuances prior to listing taking into account management activity, significant developments, and elapsed time as well as arm’s-length party participation.

The guidance set out in this notice is effective immediately.

For questions about CSE Listings Policies or procedures, please contact: [email protected], or 416-367-7340.