An Ontario government task force issued a series of recommendations aimed at making capital raising in the public markets easier for issuers of all sizes, something that experts say could be especially beneficial for Canada's junior miners.
In its final report in January, the Ontario Capital Markets Modernization Taskforce called for 74 sweeping reforms to the province's capital markets, including a recommendation to overhaul the Ontario Securities Commission itself. That proposal called for updating the OSC's mandate to include capital formation and competition in the markets; renaming the commission; splitting the Chair and CEO roles; and separating regulatory and adjudicative functions.
In its focus on improving the capital raising process, the taskforce recommended adopting a well-known seasoned issuer model for larger companies and an alternative offering model for smaller reporting issuers, as well as allowing companies to gauge investor interest before issuing a preliminary prospectus. It also recommended a prohibition on short-selling around prospectus offerings and private placements.
"I think the mining industry will welcome a taskforce turning its mind to ways to streamline the capital raising process ... and be pleased to see a recognition that for smaller companies, we should actually consider how we can make capital raising easier," Michael Pickersgill, partner at Torys LLP and co-head of the firm's mining and metals practice, said in an interview with The Northern Miner.
The total number of listed issuers in Canada has declined in the past decade, the taskforce noted in its report, as has the number of new listings on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV). In 2007, the report found, roughly 200 new companies joined the TSX and another almost 400 joined the TSXV; in comparison, in 2020 just over 100 had joined the TSX and less than 100 listed on the TSX by September.
"Instead of proceeding through the traditional route to list publicly, emerging companies are increasingly relying on the availability of alternative sources of funds, such as angel investors, venture capital and private equity, often to avoid the significant costs and compliance that comes with public funding," the report said. "Among other consequences, this reduces the opportunity for direct retail investor participation in the economic growth of our province."
Pickersgill said that's a trend that has extended to the mining industry, particularly for junior miners, where private equity and other forms of private capital have helped to fund project development, as opposed to public equity and debt.
"In 2020 there were opportunities for developers to raise capital because of the underlying economics and the commodity prices for precious metals in particular ... [But] there has been generally, if you look at the trend over the past 10 years, a real increase and prevalence in private sources of capital funding project development," he said. "The prevalence of that alternate financing model has mirrored the challenges of the public markets described by the taskforce."
The challenge with private capital, he noted, is it tends to be more expensive than public equity financing. "Access to the public capital markets allows you to build a better overall blend of capital structure. Even though there's a lot of work to do to put meat on these proposals, [the mining industry] will really welcome that direction."
The taskforce recommended the OSC adopt a well-known seasoned issuer model to issue shelf prospectus receipts automatically for companies that have a minimum public float of $500 million. "This would streamline the shelf prospectus process for such large issuers that meet the prescribed thresholds and make it more cost-efficient for such issuers to raise capital in Ontario's capital markets," the report said.
It also recommended an alternative offering model for smaller companies that can't as easily absorb the costs of conducting a public offering. Companies would need to have been reporting issuers for 12 months and be up to date with their continuous disclosure in order to use the prospectus exemption. They would also need to file a short disclosure document with the appropriate regulator and certify its accuracy.
Any offering under this model should be subject to an annual maximum, the taskforce said, recommending that for companies with a market capitalization of less than $50 million, the maximum should be the lesser of $5 million or 100% of the issuer's market cap.
The Prospectors and Developers Association of Canada was supportive of the proposal when it was included in the taskforce's consultation report in July. Jeff Killeen, the association's director of policy and programs, finance and taxation, securities, geoscience and health and safety, told The Northern Miner in October that the model "could certainly add a new, flexible way for companies to reach markets."
The taskforce proposed allowing reporting issuers and their advisors to pre-market transactions to institutional investors before filing a preliminary prospectus, noting that an inability to "test the waters" with investors is one of the reasons behind public companies increasingly relying on private financing. The change would bring Ontario into alignment with the United States, which enabled issuers to engage in test-the-waters conversations with institutional buyers and investors in 2019.
"The ability to communicate with potential investors to gauge the demand for a public offering would minimize the risk of failed transactions," the report said.
Ian Russell, president and CEO of the Investment Industry Association of Canada, said in an interview that several recommendations aimed to cut red tape for issuers would be beneficial to junior miners.
"There are a number of handicaps to smaller companies that are trying to underwrite or raise capital, and one of the biggest impediments is regulatory cost," he said, pointing to ongoing disclosure costs, as well as during the underwriting and prospectus processes.
The report recommended consolidating reporting and regulatory requirements for issuers, including combining the form requirements for the annual information form, MD&A and financial statements; streamlining the material change report; and combining the simplified prospectus and annual information form into one annual disclosure document.
The taskforce set its sights on short-sellers, with recommendations to prohibit short selling in connection with prospectus offerings and private placements in order to stabilize the underwriting process. The recommendation would prevent market participants and investors who had previously sold short securities of the same type as offered under a prospectus or private placement from then acquiring securities in that offering.
"We've always had a strong position about that, [because] ... it can be disruptive in underwriting securities," said Russell. "It's a very delicate process to stabilize the market [during underwriting], and if you allow short selling it's just aggravating the whole problem."
The report recommended that the Investment Industry Regulatory Organization of Canada amend its universal market integrity rules to require that short sellers confirm they can borrow the securities they're attempting to short, which would effectively end the practice of naked shorting. The taskforce also proposed short sellers be subject to a mandatory buy-in if a short sale fails to settle. The buy-in requirement would be triggered two days after the settlement date, or four days after the trading date.
Terry Lynch, CEO of junior miner Chilean Metals (TSXV: CMX)and the founder of Save Canadian Mining, an advocacy group opposed to "predatory short selling" that targets junior mining companies, applauded the recommendations. While the current system requires transactions be settled in two days, an exception allows investors to go up to ten days if there are exceptional circumstances.
"The reality is, hedge funds have driven a truck through this," Lynch said in an interview. "Institutions that trade algorithmically, they'll sell a stock, not cover it in two days, and on day 11 shift it to another company. It's like stock kiting, really. [The proposal] would eliminate the kiting and would be helpful to stop predatory shorts."
The taskforce also proposed amending Ontario securities legislation to require publicly listed issuers in Canada to set their own board and executive management diversity targets and mandating the disclosure of material environmental, social and governance risk information, specifically climate-related disclosures that are compliant with the Task Force on Climate-related Financial Disclosures recommendations for issuers.
"Those are two areas where the mining industry is very focused now, because of certain perceived true or false shortcomings historically," Pickersgill said. "I think the industry and investor groups will welcome that, and in some cases investors and issuers themselves welcome some clarity about expectations for disclosure and expectations for reporting because it allows them to get on with the business of affecting change and disclosing that change in a matter that's consistent across the industry."