The Ontario Securities Commission (OSC) has proposed a strict liability offence for distributions by reporting issuers in Ontario, prohibiting any person or company who has sold a security short (as newly defined) within the five business days before the pricing of a prospectus offering or private placement of the same class of securities sold short, from participating in the offering, unless an exemption is available.

The purchase of securities in the offering is prohibited even if (i) the short seller had no prior knowledge of the offering, (ii) the offering did not constitute a “material fact” or “material change” concerning the issuer, and (iii) the short sales had no impact on the market price of the securities sold.

CFFiM Analysis: Regulation should be based on empirical data and consider the distinct features and market trends of Canada’s own capital markets.  CFFiM supports the OSC in a focus on regulations that grow a market for all companies, large and small, and reflect the real risks and benefits posed to the Canadian market. The Proposed Amendments have not been guided by meaningful disclosed data or analysis to show that there is a pervasive, quantitative, or qualitative problem that needs to be solved through the Proposed Amendments.

Canada’s current legislative and regulatory requirements are extensive. They include requirements of proof of intent to reassure the public that law and regulation are fair, focused and not arbitrary. These requirements may guide a detailed and contextual analysis of a distribution, formal bid or share exchange transaction that creates the boundaries necessary for a proportionate response.

The relatively small size, lower liquidity, and less active short selling in Canada make a direct or wider transplant of SEC Rule 105 concerning. Importantly, Canadian startups and venture firms who are reporting issuers, as drivers of innovation, often develop needed disruptive technologies in artificial intelligence, clean energy, biotechnology, fintech, and other high-growth sectors. They are vital to Canada’s economic and technological landscape. They face significant profitability challenges and need multiple and alternative funding over an extended period. The Proposed Amendments augment rather than ease this challenge.

Details of CFFiM’s analysis is found ici.