TSX Company Manual:

TSX Company Manual
Part I Introduction
Part II Why List on the Toronto Stock Exchange?
Part III Original Listing Requirements
Part IV Maintaining a Listing — General Requirements
Part V Special Requirements for Non-Exempt Issuers
Part VI Changes in Capital Structure of Listed Issuers
Part VII Halting of Trading, Suspension and Delisting of Securities
Part VIII Fees Payable by Listed Companies
Part IX Dealing with the News Media
Part X Special Purpose Acquisition Corporations (SPACs)
Part XI Requirements Applicable to Non-Corporate Issuers
Provisions Respecting Conflict of Interest and Competitors of TMX Group Limited
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Location: TSX Company Manual > Notices of Approval > Notice of Approval Amendments to Part X of the Toronto Stock Exchange Company Manual (October 4, 2018) > Appendix A Summary of Comments and Responses

Effective Date Appendix B Blackline of Final Amendments Compared Against RFC Amendments

Appendix A Summary of Comments and Responses

  Versions
(1 version)
 
Oct 4 2018 onwards

List of Commenters:

Alignvest Acquisition II Corporation Polar Asset Management Partners
Goodmans LLP

Capitalized terms used and not otherwise defined in the Notice of Approval shall have the meaning in the TSX Request for Comments - Amendments to Toronto Stock Exchange Company Manual dated May 31, 2018.

Summarized Comments Received TSX Response
Prohibition on Debt Financing (Section 1009)
1. Is a limit on loans based on the lesser of: (i) 10% of funds in escrow; and (ii) $5 million appropriate provided that there is no recourse for the loans against the escrowed funds and the limit is disclosed in the IPO prospectus? If not, why not and what is an appropriate limit?
(a) One commenter was supportive of permitting SPAC founders and others to make loans to SPACs. TSX thanks the commenter for its input.
(b) Two commenters were not supportive of imposing a limit on the amount of such loans and stated the following:
•   provided that the lender has no recourse to the escrowed funds, and provided that appropriate disclosure is included in the IPO prospectus, a limit on such loans should not be imposed.
•   given that the founder loans would be without recourse to the funds in escrow, the only financial impact of the loans would be to reduce the equity value of the post-transaction company.
•    given the limited amount of working capital that is available to most SPACs, loans from their sponsors or others may be critical to allowing SPACs to properly and effectively identity, select, pursue, diligence and complete suitable and successful qualifying acquisitions.
•   the imposition of arbitrary limits on financing has the potential to harm SPAC issuers and shareholders by starving SPACs of necessary working capital, which may, in certain circumstances, result in the premature wind-up of a SPAC or the completion of an acquisition that is sub-optimal in its process and/or target.
•   financing decisions should be a matter for the business judgement of the board of directors.
•   it is not appropriate to base a limit on loans, if imposed, on a percentage of the funds in escrow. Many costs of maintaining a SPAC, complying with its regulatory obligations and identifying, pursuing and completing a qualifying acquisition are not a function of the SPAC's size. Accordingly, the effects of a size-based limit are particularly harsh for smaller SPACs and may inappropriately influence a sponsor's decision as to the appropriate size of a SPAC.
TSX thanks the commenters for their input. TSX has amended the rule to limit the maximum aggregate principal amount of unsecured loans to 10% of the funds escrowed. The loan must be on reasonable commercial terms, may be from founding securityholders or their affiliates, and must not have recourse against the escrowed funds.

Given the unique nature of the SPACs, TSX continues to believe that is not unreasonable to place a limit on loans, even where there is no recourse on the escrowed funds. TSX will continue to monitor the status of this limitation and determine if future amendments are necessary.
(c) One commenter suggested that consideration be given to allowing convertible debt or warrants. The issuance of convertible debt or warrants, as consideration for a loan, could be effect only if (i) such issuance occurred concurrently with the completion of the qualifying acquisition, and (ii) the details of such issuance are disclosed in the prospectus for the resulting issuer (which disclosure should include, as applicable, conversion or exercise price, interest payable, and term of expiry).
Public Distribution (Sections 1015 and 1029)
2. Is it appropriate to permit SPACs to meet a lower public distribution requirement (i.e. 150 public board lot holders) upon their original listing, as opposed to the public distribution requirement for corporate issuers (i.e. 300 public board lot holders)?
(a) Three commenters were of the view that the lower public distribution requirement is appropriate for SPACs.

One commenter did not view the lower public distribution requirement as an impediment to a qualifying transaction being completed or as an impediment to a broader distribution after the closing of a qualifying transaction. The commenter also noted that the proposed lower distribution requirement mirrors changes being made for U.S. SPAC listing requirements.
TSX thanks the commenters for their input.
3. Is it appropriate to permit the resulting issuer to provide evidence that it meets the public distribution requirements set out in Section 315 (i.e. 300 public board lot holders) within 90 days of the closing of the qualifying acquisition? Would it be more appropriate for the resulting issuer to meet the continued listing requirements under Part VII for public distribution (i.e. 150 public board lot holders) within 90 days of the closing of the qualifying acquisition? If the continued listing requirements are more appropriate, please reconcile your response to the listing of the resulting issuer as new listing, similar to a backdoor listing or reverse takeover.
(a) One commenter was of the view that resulting issuers should be required to meet the continued listing requirements of 150 public board lot holders (rather than 300 public board lot holders) and this lower public distribution requirement for resulting issuers would have a meaningful impact on SPACs and would not be prejudicial to investors. The commenter stated that SPAC shareholders invest in SPACs with full knowledge that redemptions at the time of a qualifying acquisition may reduce the public float of a resulting issuer. The commenter was of the view that in order to address concerns regarding a smaller public float, disclosure could be included in the IPO and qualifying acquisition prospectuses to address any increased liquidity risk resulting from the lower threshold.

The commenter stated that the existence of redemption rights distinguishes SPACs from other entities going public through a backdoor listing or reverse take-over, as SPACs can experience a significant reduction in their public float that is beyond the control of the resulting issuer. The commenter was of the view that this is unlike a backdoor listing or reverse takeover where any reduction of the public float is within the control of the issuer and can be structured so as to ensure that the resulting issuer satisfies the public distribution requirements.

The commenter proposes that the time period within which a SPAC must satisfy the public distribution requirement (whether set at 150 or 300 board lot holders) should be extended to 180 days to provide the resulting issuer with more time to increase its public distribution in the best manner possible for the SPAC. The commenter was of the view that if a shorter time period is imposed, the resulting issuer may need to take steps to increase its public distribution in a sub-optimal manner. For example, the best way to increase a resulting issuer's public distribution may be through a bought deal financing which may not be available to a resulting issuer within 90 days after closing its qualifying acquisition.
TSX agrees that the redemption right does distinguish a SPAC from a backdoor listing, which was the rationale for allowing time to achieve and provide evidence of meeting the distribution requirement. While TSX agrees it is appropriate to extend the period in which to evidence meeting the distribution requirement from 90 days to 180 days from the qualification date, TSX does not agree that the continued listing distribution requirement of 150 board lot holders is appropriate. TSX considers the original listing distribution requirement of 300 board lot holders appropriate for all going public transactions whether by way of IPO, reverse take-over or qualifying acquisition. Although TSX is prepared to allow an extended period of time to achieve the distribution due to the redemption rights embedded in the SPAC structure, TSX fundamentally believes that a lesser standard should not apply any of the going public type of transactions.
(b) One commenter stated that SPACs generally provide an alternative route for companies to go public that might not be able to otherwise go public through a traditional IPO and that a lower demand on public distribution for SPACs furthers this opportunity. However, the commenter did not believe that there is additional value in requiring a broader shareholder base following the closing of a qualifying transaction and believe that this requirement could be a distraction from the management of the SPAC post qualifying transaction. The commenter distinguishes SPACs from issuers resulting from a reverse takeover in that SPACs are subject to a redemption of their shares at the time of the qualifying transaction (leading to heightened concentration in their shareholder base) and, historically, have been less likely to raise additional capital through equity issuances. Please see our response to comment 3(a) above.
(c) One commenter was of the view that 90 days should provide a sufficient amount of time to demonstrate that the resulting issuer meets the public distribution requirement of 300 board lot holders. TSX thanks the commenter for its input. Please also see our response to comment 3(a) above which notes our extension from 90 to 180 days to demonstrate that the resulting issuer meets the distribution requirement.
1. If resulting issuers fail to meet the public distribution requirement, is it appropriate to put them under a remedial delisting review which provides up to 120 days to remediate their deficiencies?
(a) One commenter was of the view that if shareholders of SPACs have a concern that the resulting issuer facing possible delisting review shortly following closing of its qualifying acquisition, this may have an impact on their redemption decision and potentially lead to a higher level of redemption. The commenter stated that this would further exacerbate the distribution problem and would also have a negative impact on the SPAC program, generally. The commenter was of the view that a delisting review should not be triggered under these circumstances until all other remedial options have been explored and sufficient time is afforded to the SPAC to do so. It stated that if a delisting review is ultimately required, that this review not be initiated until at least 12 months from the closing of the qualifying acquisition. Generally, an issuer must provide evidence to TSX that it meets TSX's original listing requirements set out in Part III of the Manual, failing which, TSX will not approve the listing.

This is in contrast with the proposed amended section 1029 of the Manual, which provides the resulting issuer with up to 180 days from the completion of the qualifying acquisition to provide evidence that it meets the public distribution requirements as set out in Section 315 of the Manual. Where the resulting issuer cannot demonstrate compliance within the prescribed time period, TSX may place the resulting issuer under a remedial delisting review which provides the resulting issuer with up to 120 days to remediate its deficiencies. In total, 300 days (approximately 10 months) would be permitted for the issuer to provide evidence of meeting the distribution requirement prior to delisting.

Given the unique issues related to SPACs, TSX believes that it is not unreasonable to provide the resulting issuer with additional time to establish the minimum distribution (now 180 days) and provide supportive evidence of distribution, failing which, the resulting issuer may be reviewed under TSX's continued listing requirements under Part VII of the Manual. In the absence of clear requirements and a potential delisting review, TSX's experience is that issuer may not always comply in a timely manner. TSX believes that this is fair and appropriate.
(b) One commenter stated that the remedial delisting review would be a reasonable approach where the resulting issuer fails to meet the public distribution requirement. TSX thanks the commenter for its input.
Shareholder and Other Approvals (Sections 1024 to 1026) & Prospectus Requirement (Section 1028)
5. Given the redemption rights available to public shareholders and prospectus level disclosure for the resulting issuer upon completion of the qualifying acquisition, is it appropriate to waive all TSX shareholder approval requirements provided that the 100% Escrow Condition is met? This shareholder approval waiver would include matters such as dilution exceeding 25%, material effect on control, adoption of security based compensation arrangements and transactions pursuant to which insiders may receive consideration exceed 10% of the market capitalization of the SPAC, etc., all of which would have otherwise required shareholder approval under applicable TSX rules.
(a) One commenter was of the view that the transaction approval vote is not meaningful since shareholders can "vote" against a transaction by redeeming their shares. The commenter stated that if the SPAC manager wishes (or the market demands), there is nothing precluding the inclusion of a voting right separate from redemption rights; nor is there anything precluding holding a vote even if there was no voting right. TSX thanks the commenter for its input.
(b) One commenter was supportive of waiving all shareholder approval requirements as a way to minimize costs and accelerate the timelines to close qualifying acquisitions. TSX thanks the commenter for its input.
(c) One commenter was of the view that shareholder approval should not be necessary in light of shareholders' redemption rights. TSX thanks the commenter for its input.
6. Should the 100% Escrow Condition be imposed as a condition of waiving the shareholder approval requirements? Alternatively, would the basic escrow requirement for an amount to be placed in escrow of at least 90% of the gross proceeds of the IPO be sufficient to waive shareholder approval requirements?
(a) One commenter stated that, as noted in the Request for Comments, all TSX SPACs to date have escrowed sufficient funds to return 100% (or more) of the original IPO price. The commenter noted that this has been the case in the U.S. for at least 10 years. As a result, the commenter does not believe that altering investor rights between different SPACs will have a practical impact on the market, as market participants have addressed this issue. In the unlikely event a SPAC manager were to propose a SPAC with less than 100% of the IPO proceeds in escrow, the commenter believes that market participants would expect compensation in lieu and that an additional voting right (if it were considered to be appropriate) would be negotiated between market participants at the time of the IPO. TSX thanks the commenter for its input.
(b) One commenter was not supportive of imposing the 100% Escrow Condition as a condition of waiving the shareholder approval requirements. The commenter was of the view that the question of what percentage of the funds raised from public shareholders on a SPAC IPO should be placed in escrow (above the 90% regulatory minimum) is an economic one to be determined by the issuer, underwriters and potential investors on a case by case basis.

The commenter stated that a rule which ties the benefit of dispensing with the added costs, complexity and delay of the shareholder approval process to the 100% Escrow Condition may preclude SPACs from being structured to give public shareholders some level of "skin in the game". This structure may benefit SPACs, their investors and the SPAC market generally by attracting different investor constituencies, especially those with an interest in investing in a particular sponsor group or management team with a particular strategy or investment thesis. At the same time it may discourage short-term opportunistic investment behavior.

The commenter stated that if it is felt that some minimum escrow level above the 90% regulatory minimum is required to dispense with shareholder approval, the commenter would propose 95%. The commenter was of the view that at a level of 95% or more, SPAC shareholders would still be assured of the ability to receive almost all of their initial investment back and provided that adequate prospectus disclosure of the qualifying acquisition process is included, the commenter believes it would not be prejudicial to allow a qualifying acquisition to proceed without shareholder approval. This approach would be similar to the Capital Pool Company ("CPC") program which does require shareholder approval for a qualifying transaction but imposes limits on the amount of capital that a single investor can invest and on the aggregate amount of capital a CPC can raise.
SPACs will remain able to place a minimum of 90% in escrow, however, in such circumstances a shareholder vote will be required for the qualifying acquisition and other matters ordinarily triggering shareholder approval under the Manual. TSX accepts that an ability to receive 100% of an investment may replace shareholder approval. However, having some lesser amount available in escrow unnecessarily complicates the structure of the SPAC and deviates from TSX's principal of substituting a redemption of 100% of an investment for shareholder approval, notwithstanding the limitation of the amount.
(c) One commenter was supportive of the 100% Escrow Condition. It was of the view that SPACs are already complicated and difficult for investors to understand. At minimum, however, they know that 100% of their principal is protected. The commenter stated that that guarantee is a critical part of the attractiveness of the sector, and we would not wish to call that guarantee into question. TSX thanks the commenter for its input.
7. If a qualifying acquisition is not subject to shareholder approval, is it appropriate to require delivery of a prospectus at least two business days prior to the redemption date? In addition, the prospectus would be electronically available on SEDAR and the SPAC's website 21 days prior to the redemption date
(a) One commenter supported TSX's proposal to make the prospectus electronically available on SEDAR and the SPAC's website 21 days prior to the redemption date. The commenter was of the view that if the prospectus is made electronically available, then physical delivery of a prospectus should be limited to those shareholders who request a copy as this would save the SPAC both time and costs as it prepares for the closing of its qualifying acquisitions. TSX thanks the commenter for its input. The delivery of the prospectus was designed to align with current requirement under securities laws for an IPO.

While TSX recognizes that in the current era, paper and physical delivery are less necessary, certain stakeholders felt that delivery of the prospectus for the resulting issuer should align with other prospectus delivery requirements under securities laws. TSX has amended the rule to allow for the prospectus to be delivered electronically in compliance with National Policy 11-201 - Electronic Delivery of Document.
(b) One commenter was not supportive of requiring physical delivery of the prospectus. It was of the view that it is an extra expense, and is redundant given the availability of the materials online. TSX thanks the commenter for its input. Please see our response to comment 7(a).
8. Where no shareholder approval is required, is 21 days an appropriate notice period for the redemption?
(a) Three commenters were supportive of a 21 notice period for the redemption where no shareholder approval is required. TSX thanks the commenters for their input.
Other Questions
1. Are there any other amendments to Part X that TSX should consider?
(a) No comments received.  
General Comments Received
(a) One commenter was generally supportive of the changes to the Canadian market that further conformed to the well-established operations and structure of the larger and more mature U.S. SPAC market. The commenter is of the view that the Proposed Amendments are generally consistent with this approach and the commenter welcomes the implementation of such amendments. TSX thanks the commenter for its input.
(b) One commenter was of the view that the rules relating to the SPAC structure and process of forming and listing a SPAC and completing a qualifying acquisition should be as simple as possible and should allow SPACs to raise capital and identify, pursue and complete acquisitions as efficiently and effectively as possible, while providing appropriate investor protections. The commenter encourages TSX and the Canadian securities regulators to continue to take a flexible approach to the regulation of SPACs and other blind pool offerings and to be open to the consideration of alternative blind pool structures to allow appropriate issuers and management teams to access the Canadian public market. TSX thanks the commenter for its input.

Effective Date Appendix B Blackline of Final Amendments Compared Against RFC Amendments

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