Roadblocks to listing on TSX-V

If your company has operations in what Canada Revenue Agency deems to be an “emerging market,” be prepared for a long and onerous process of achieving a listing on the TSX Venture Exchange

B.C.-based companies with operations in emerging markets that are considering applying for a listing on the TSX Venture Exchange in order to access the Canadian capital markets should be aware of new rules being applied by the TSX-V. The impact of these new rules may come as a surprise.

Our firm recently worked with a technology company with operations in South Korea, looking to expand its business into North America, and to access the North American capital markets. B.C. is an attractive jurisdiction for technology companies, and a listing on the TSX-V costs a fraction of a listing in the U.S. These benefits ultimately led our client to move its head office to Canada, and when the time was right, to pursue a listing on the TSX-V through a reverse takeover.

What came as a surprise to our client was the intense scrutiny it received throughout the listing process as a result of its connection with South Korea. The heighted level of scrutiny facing our client was the result of new rules developed by the TSX-V in December 2012 in response to concerns expressed by the Ontario Securities Commission in the wake of the Sino-Forest fraud allegations. Despite the fact that the new rules remain in draft form, the TSX-V has made it clear that it will apply the draft rules to emerging-market issuers.

The draft rules define an “emerging market issuer” very broadly as any issuer whose principal business operations are located outside of Canada, the U.S., Western Europe, Australia and New Zealand (there is a carve-out for certain resource issuers, which will applies to many mining and oil & gas companies).

This approach will catch companies with operations in countries such as South Korea, Japan or Hong Kong, despite the fact that these countries represent some of the world’s most advanced economies.

The result for the time being is that companies with operations in emerging markets should expect to receive significant additional scrutiny from the TSX-V, which will subject emerging-market issuers to additional due diligence, including in their local jurisdiction. The qualifications of management, directors, committees and auditors will be carefully reviewed. The TSX-V may impose additional sponsorship requirements. Emerging market issuers may also be subjected to onerous financial reporting requirements, including auditor reviews of interim statements, requiring issuers to engage their auditor to review and evaluate their internal controls prior to listing, and requiring CEO and CFO certifications of the issuer’s internal controls over financial reporting. These additional measures can add months to the listing process, and increase the cost of listing for emerging-market issuers relative to their non-emerging market issuer peers by tens of thousands of dollars.

The TSX-V will consider applications to exclude a jurisdiction from the definition of an emerging-market jurisdiction on a case-by-case basis. For example, our firm successfully applied to the TSX-V on behalf of our client to have South Korea excluded from the definition for purposes of its listing application. This process is time consuming, but may be worth the additional time and expense given the significant additional costs associated with the draft rules.

Our client’s listing application was ultimately successful, but the policies being applied by the TSX-V resulted in months of delays and significant expense. This is one example of the frustration that many companies with operations in Asia and other emerging markets have faced over the last year as a result of new rules being applied by the TSX-V.

We may see changes to the current draft policy over time as the TSX-V receives feedback from market participants. In the meantime, however, Canadian companies with operations in Asia or other “emerging markets” that are considering a Canadian listing should very carefully consider the requirements currently being applied before engaging with the TSX-V.

Jeffrey Read (right) is a partner in the Corporate Commercial Group and Securities and Capital Markets Group, and Michael Waters is a partner in the Securities and Capital Markets Group, both in the Vancouver office of Borden Ladner Gervais LLP.