Industry, investors divided on proposed Ontario capital market reforms

Institutional investors, industry groups and experts are divided on a set of substantial capital markets reforms being proposed by Ontario’s capital markets modernization taskforce.

The taskforce, set up in February by Ontario Finance Minister Rod Phillips, released a set of 47 proposed reforms over the summer that could impact mining issuers if they were implemented. The suggestions included introducing the option to move to semi-annual reporting from quarterly reporting; creating an alternative offering model for reporting issuers; introducing a well-known seasoned issuer model such as in the United States; and giving public companies greater flexibility to gauge investor interest in a prospectus offering. The three-month comment period concluded in September.

Commenting on the proposed changes, James Brown, partner in Osler, Hoskin & Harcourt’s corporate group and co-chair of the firm’s mining group, said the impact will depend on the size of the mining issuer. “[For] larger issuers that are cross-border, some of the proposals are intended to make their lives easier.”

Brown pointed to the proposal to incorporate a well-known seasoned issuer model for capital-raising. The model would give certain public companies a less burdensome registration process for a shelf prospectus — a short-form prospectus that companies can file on SEDAR for a public offering when they have no intention to immediately sell all of the qualified securities. Qualifying companies would need to be above a certain free float or have issued debt securities above a set amount in a specific time period, with a strong disclosure record. “[That’s] a proposal we think is going to be helpful to reduce regulatory burden,” Brown said in an interview.

However, he noted, many junior miners won’t be able to take advantage of that system because they choose not to file annual information forms due to cost-constraints or other reasons, cutting them out of the short-form prospectus system.

In its submission to taskforce chair Walied Soliman, the Prospectors and Developers Association of Canada (PDAC) was supportive of several of the proposals that would seem to benefit junior mining companies, such as the suggestion to introduce an alternative offering model for reporting issuers.

While large public companies can absorb the cost of conducting a public offering, they present a barrier to small companies, the taskforce’s report noted. The alternative model would allow smaller companies to raise capital based on a short offering document and their continuous disclosure record, rather than a full prospectus filing. Companies would need to be reporting issuers for 12 months and be up to date with continuous disclosure to participate.

PDAC proposed a $10-million maximum capital-raising limit within a 12-month period for smaller issuers, and more than that for larger issuers. It suggested the limit should be proportional to issuers’ market capitalization so the alternative offering model couldn’t be used to finance a material acquisition or change of business.

“One of the principle concerns PDAC has for its members is ensuring a smooth, effective access to capital, given the nature of their businesses, and something like this alternative offering model could certainly add a new flexible way for companies to reach markets,” Jeff Killeen, the association’s director of policy and programs, finance and taxation, securities, geoscience and health and safety, said in an interview with The Northern Miner.

Similar proposals have been entertained by the British Columbia Securities Commission and the Canadian Securities Administrators.

The Investment Industry Association of Canada, however, said such a model would “degrade the reputation of Canadian capital markets.” It argued it would have a negative impact on continuous disclosure available to the secondary markets because of an absence of underwriter due diligence and regulatory review on such offerings, and expressed concern at the lack of proposals to protect retail investors if such a model were implemented.

PDAC expressed support for a proposal from the taskforce to move to semi-annual reporting. However, the association said such reporting should only apply to small issuers that reported no revenue from regular operations in the previous two years.

“For junior explorers, a move to semi-annual reporting could provide more time and resources for exploration, which is the principal way they provide value for their investors,” Killeen said. As well, he noted, those companies are already required to disclose material changes to their business on a continuous basis through press releases.

On the investor side, the Pension Investment Association of Canada, which represents more than 130 of the largest pension plans in the country responsible for more than $2 trillion in assets under management, said it supports semi-annual reporting from issuers, with caveats. “PIAC is of the belief that providing quarterly reporting and guidance may lead some issuers to focus on short-term thinking and to make decisions that are short-term oriented to meet the demands of the market and lead to less than optimal outcomes for shareholders and the beneficiaries of the pension plans that PIAC represents,” it said.

However, any move to semi-annual reporting should include timely disclosures of material changes to the issuers’ business plans and activities to ensure transparency, it added.

The Investment Industry Association of Canada said it supports allowing semi-annual reporting for TSX Venture or Canadian Securities Exchange issuers, but not for larger companies on the TSX. “Issuers benefit from the structured and frequent communication with investors that comes with the quarterly reporting cycle.”

Australia and the United Kingdom have implemented such reporting, but other provincial regulators and the United States have not. Osler’s submission to the taskforce pointed out that a move to semi-annual reporting, and other proposed changes, would put Ontario out of step.

“While many of the proposals present interesting ideas for Ontario’s capital markets, simply making changes in Ontario alone isn’t helpful,” Brown said. “Virtually all public companies in Canada report in more than one jurisdiction, so unless the changes are harmonized across the country, there is little benefit to making changes in Ontario to mining issuers, big or small, where they continue to have to comply with different standards in another province or territory.”

Killeen said the PDAC is less concerned with harmonization with the United States. “Canada and Ontario are top destinations for raising capital for the mineral exploration industry, and we’re certainly focused on maintaining that position,” he said. “Alignment with the U.S. regulatory framework isn’t always paramount. Ensuring our capital markets are nimble, streamlined and [have] strong investor protections, those are top priorities.”

To encourage more public companies to use prospectus offerings for financings, rather than relying on private placements, the taskforce recommended greater flexibility for issuers and their advisors to gauge institutional investor interest in a potential prospectus.

“The Taskforce believes that a greater ability to communicate with potential investors to gauge the demand for a public offering would minimize the risk of failed transactions,” it said, adding that such flexibility would need to be accompanied by increased monitoring and compliance examinations on the trading of investors that have advanced information about a potential prospectus.

This would bring Ontario up to speed with similar rules in the U.S., according to Brown. He said Ontario should attempt to more closely align its rules with the U.S., including those around testing the waters prior to a prospectus offering, as the U.S. markets provide a major source of capital for Canadian issuers. “We don’t want Canadian companies to decide, ‘I’m not going to bother with Canada because [it’s] too difficult, I’m only going to go public in the U.S. All that does is it prejudices Canadian investors.”

The taskforce also proposed prohibiting short selling in connection with prospectus offerings and private placements, by preventing market participants and investors that have previously short sold the same type of securities as offered under a prospectus or private placement from acquiring securities under those deals. It noted stakeholders have said short-selling around prospectus offerings has made the pricing and execution of those offerings more difficult, because they’re generally priced at a discount to market price.

“Market participants and investors who expect to purchase under the offering may seek to profit through aggressive short selling prior to the offering to depress the price of the offering,” it said, further noting that pre-arranged bought deals with hedge funds that are shorting the stock prior to the announcement are “rife in the Canadian markets and particularly targeting capital intensive industries.”

PDAC called for more research into short selling before any changes are implemented. “[We don’t] think there’s a proper understanding of the impacts of short selling in the marketplace right now,” Killeen said. “We certainly hear anecdotal comments about short selling in the marketplace around offerings and otherwise, but without that quantitative understanding of what the real dynamic looks like, we’re reticent to recommend regulatory changes that may not address the issues that are out there.”

— Kelsey Rolfe is a freelance journalist based in Toronto. She has written about the mining sector for more than five years and was previously a section editor at CIM Magazine in Montreal.