BCN 2001/58 - Approval of Acquisition of CDNX by the TSE [BCN - Rescinded]

On July 31, 2001, the Commission approved the acquisition of the Canadian Venture Exchange Inc. (CDNX) by the Toronto Stock Exchange (TSE) (the transaction), and issued an order for the continued recognition of CDNX as an exchange in British Columbia under section 24(2) of the Act effective on closing of the transaction. A copy of the order is attached. The order revokes and replaces the recognition order the Commission issued when CDNX was created on November 26, 1999 by the merger of The Alberta Stock Exchange (ASE) and the Vancouver Stock Exchange (VSE).

CDNX is also recognized as an exchange under the Securities Act (Alberta) and the Alberta Securities Commission (ASC) issued a similar order on July 31, 2001. On the same date, the Ontario Securities Commission issued a new order exempting CDNX from recognition as an exchange under section 21 of the Securities Act (Ontario), which replaces the exemption order issued by the OSC on December 5, 2000.

Background
By application dated May 16, 2001, CDNX applied for approval of the transaction. Following the transaction, CDNX will be a wholly owned subsidiary of the TSE and a for-profit corporation.

On May 18, 2001, we published CDNX’s application, requested comment, and asked specific questions about the views of British Columbia market participants on the transaction (BCN2001/35). In addition, we discussed the transaction with two focus groups of marketplace participants and with our Securities Law Advisory Committee and our Securities Policy Advisory Committee. The ASC published a similar notice and conducted similar consultations. We attach a summary of the written comments we received.

Decision
CDNX’s application contained a number of significant changes to the representations and undertakings made when its predecessors, the ASE and VSE, applied for the recognition of CDNX in November 1999. The Commission therefore decided to issue a new order to set out the terms and conditions of CDNX’s continued recognition as an exchange in British Columbia following the transaction. The terms and conditions include provisions that are intended to ensure that CDNX continues to foster a vibrant junior capital markets for investors and issuers in British Columbia.

The Commission issued its order on the basis of the representations contained in CDNX’s application and after having obtained from the TSE the representations, undertaking and acknowledgements set out in the attached the TSE letter.  We obtained the TSE letter because, as a wholly owed subsidiary of the TSE, CDNX will require the support and cooperation of the TSE to comply with the terms and conditions of its continued recognition order.

Key conditions and commitments include:

• CDNX cannot make any significant changes to the services and functions currently provided by CDNX through its Vancouver and Calgary offices without the prior approval of the ASC and BCSC;
• The CDNX/TSE board will have significant representation (i.e., 25%) from persons with expertise in or association with the Canadian public venture capital market;
• The TSE will have an advisory board comprised of individuals with expertise in the Canadian public venture capital market that will be responsible for advising and making recommendations to the TSE board regarding that market;
• The TSE will allocate sufficient financial and other resources to CDNX to ensure that CDNX can carry out its functions as an exchange; and
• The TSE cannot discontinue or sell the operations of CDNX without providing significant advance notice to the ASC and BCSC.

The Commission will need, on a continuing basis, to receive certain information about the TSE that may be relevant to our assessment of CDNX’s operations and its financial condition.  Since the TSE is recognized as a stock exchange in Ontario and is currently required to provide that information to the OSC, the OSC has agreed to give us the relevant information (see attached letter).

The Commission’s order, the summary of written comments received on the transaction, and the TSE and OSC letters are attached to this notice.

July 31, 2001

Douglas M. Hyndman
Chair

Ref: BCN 2001/35

This Notice may refer to other documents.  These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.

COR#01/086

IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418

AND

IN THE MATTER OF THE CANADIAN VENTURE EXCHANGE INC.

Recognition Order Under Section 24(2)

Canadian Venture Exchange Inc. (CDNX) was recognized as an exchange under section 24(2) of the Act on November 26, 1999 under COR#99/323.

CDNX has applied to the Commission for approval of a transaction whereby CDNX will become a wholly owned subsidiary of The Toronto Stock Exchange Inc. (TSE) and CDNX will become a for-profit corporation (the transaction), as more fully described in CDNX’s application dated May 16, 2001 published with BCN2001/35.

CDNX’s application contains a number of significant changes to the representations and undertakings made by CDNX when its predecessors, the Vancouver Stock Exchange and The Alberta Stock Exchange, applied for its recognition under section 24(2) of the Act in November 1999.

The Commission considers it appropriate to set out in an order the terms and conditions of CDNX’s continued recognition as an exchange in British Columbia following the transaction.

CDNX and the TSE have agreed to the terms and conditions set out in the order.

Based on the application of CDNX, including the representations, undertakings and acknowledgements made by the TSE to the Commission in connection with CDNX’s application, the Commission is satisfied that the continued recognition of CDNX following the transaction will not be prejudicial to the public interest.

The Commission orders the continued recognition of CDNX as an exchange in British Columbia under section 24(2) of the Act effective on the closing of the transaction provided CDNX meets and continues to meet the terms and conditions set out in Schedule A.  Recognition will continue until the Commission, after giving CDNX an opportunity to be heard, revokes it.

This order revokes and replaces COR#99/323.

July 31, 2001

Douglas M. Hyndman
Chair

Ref:   COR#99/323

Schedule A

National Junior Exchange

1. CDNX will operate a national exchange for junior issuers under a separate brand identity and separately from the national exchange for senior issuers operated by the TSE.

2. CDNX will maintain an office in Vancouver.

Public Interest

3. CDNX will operate in the public interest.

4. CDNX will maintain by-laws, rules, regulations, policies, procedures and practices and other similar instruments that:

a) are not contrary to the public interest;

b) regulate all aspects of its business and affairs; and

c) are appropriate to foster a vibrant and effective market for junior issuers.

5. More specifically, CDNX will govern and regulate with the purpose of:

a) ensuring compliance with applicable securities legislation and its by-laws, rules, regulations, policies, procedures and practices and other similar instruments;

b) preventing fraudulent and manipulative acts and practices;

c) promoting just and equitable principles of trade;

d) fostering co-operation and co-ordination with persons engaged in regulating, clearing, settling, processing information about, and facilitating transactions in, securities; and

e) ensuring that all persons over which CDNX has jurisdiction are appropriately sanctioned for violations of securities legislation and the by-laws, rules, regulations, policies, procedures, practices and other similar instruments of CDNX.

6. CDNX will not

a) permit unreasonable discrimination between clients, listed issuers, shareholders, and members or participating organizations; or

b) impose any burden on competition that is not necessary or appropriate in view of applicable securities legislation.

Corporate Finance Services and Functions

7. Subject to paragraph 8, CDNX will continue to

a) provide corporate finance services and functions to listed issuers and applicants for listing in its Vancouver office,

b) obtain, solicit and provide regional input on the development of corporate finance policies, and

c) perform its existing decision-making and internal review and appeal processes for corporate finance matters

in a manner that is substantially equivalent to the manner in which these services, functions and processes were provided before the transaction.

8. CDNX will not make any significant change to the services, functions and processes outlined in paragraph 7 without first obtaining the approval of the Commission.

Regulatory Functions

9. Subject to paragraph 10, CDNX will continue to

a) perform listed company and market surveillance functions in its Vancouver office, and

b) use its existing decision-making and internal review and appeal processes for surveillance related matters

in a manner that is substantially equivalent to the manner in which these services, functions and processes were provided before the transaction.

10. CDNX will not make any significant change to the services, functions and processes outlined in paragraph 9 without first obtaining the approval of the Commission.

11. As long as CDNX performs any regulatory function, CDNX will advise the Commission in writing at least on a monthly basis of

a) all new investigations initiated by CDNX and provide information on the persons involved and the nature of the investigation; and

b) all investigations that do not lead to disciplinary proceedings and are closed and provide information on the date the investigation started, the conduct and persons involved and the disposition of the investigation.

12. CDNX will advise the Commission in writing on at least a quarterly basis of all significant exemptions or waivers of corporate finance policies and provide information on the issuers involved, the nature of these waivers or exemptions and the reasons for granting these waivers or exemptions.

Regulatory Oversight

13. CDNX will be subject to the joint regulatory oversight of the ASC and the BCSC.

14. CDNX will provide any proposed changes to its by-laws, rules, policies, and other regulatory instruments to the ASC and BCSC for review and approval in accordance with the review and approval procedures established from time to time by the ASC and BCSC.

15. The existing memoranda of understanding ("MOU") respecting the oversight of CDNX by the ASC and BCSC entered into by the ASC and BCSC with the Ontario Securities Commission (OSC) and the Manitoba Securities Commission, or any successor agreements, as amended from time to time, will continue to govern the regulatory oversight of CDNX.

Corporate Governance

16. CDNX will ensure that

a) the persons appointed to its board are individuals that provide a proper balance between the interests of the different persons using the services and facilities of CDNX; and

b) subject to paragraph 19, at least 50 percent of its directors are independent from CDNX and the TSE or their members and participating organizations.

17. More specifically, CDNX’s corporate governance structure will provide for:

a) fair and meaningful representation, having regard to the nature and structure of CDNX, on the board and any board or advisory committee;

b) appropriate representation on the board and any board or advisory committees of persons independent of CDNX, the TSE, any members or participating organizations of CDNX and any participating organizations of the TSE; and

c) appropriate qualification, remuneration and conflict of interest provisions and limitation of liability and indemnification protections for directors, officers and employees of CDNX generally.

18. At least 25% of the directors of CDNX will, at all times, be persons that have expertise in or are associated with the Canadian public venture capital market.

19. For purposes of making the calculation to ensure that at least 50% of the directors of CDNX are independent directors, CDNX will

a) on closing of the transaction, exclude the CEO and the President from both the numerator and the denominator; and

b) by the close of the first annual meeting of its shareholders following the closing of the transaction, exclude the CEO from the numerator and denominator and count the President and any other officer as a non-independent director.

20. By the close of the first annual meeting of its shareholders after the closing of the transaction, CDNX will amend its By-law No. 1 to give effect to the condition set out in paragraph 19 b).

21. Except as noted in paragraphs 18 to 20 , CDNX will not implement any significant changes to the corporate governance structure and practices of its board, including changes to the composition and terms of reference of its board committees and advisory committees, without the prior approval of the Commission.

Access

22. CDNX’s requirements will not unreasonably prohibit or limit properly registered dealers that are members of a self-regulatory organization or exchange and that satisfy CDNX’s requirements for accessing the trading facilities of CDNX.

23. CDNX will not unreasonably prohibit or limit access by a person to services offered by it.

24. CDNX will maintain established written standards separate from the TSE for granting access to trading through its trading facilities.

25. CDNX will keep separate records of:

a) each grant of access and, for each entity granted access to its facilities, the reasons for granting access; and

b) each denial or limitation of access and the reasons for denying or limiting access.

Fees

26. CDNX will have a fair and appropriate process for setting fees and will determine the fees it imposes on its listed issuers, applicants for listing, members, participating organizations and other market participants.

27. These fees will

a) be allocated on an equitable basis as among the parties noted in paragraph 26;

b) not have the effect of creating barriers to access; and

c) be fair, reasonable and appropriate.

Financial Viability

28. CDNX will have sufficient financial and other resources for the performance of its functions in a manner that is consistent with the public interest and the terms and conditions of this order.

29. CDNX will prepare annual financial statements, including note disclosure that would normally be included in audited financial statements, in accordance with Canadian GAAP and will file these statements with the Commission within 90 days of its financial year-end.

System Security, Capacity and Sustainability

30. CDNX will:

a) make reasonable current and future capacity estimates;

b) conduct capacity stress tests of the critical systems on a reasonably frequent basis to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;

c) develop and implement reasonable procedures to review and keep current the development and testing methodology of those systems;

d) review the vulnerability of those systems and data centre computer operations to internal and external threats, including physical hazards and natural disasters;

e) establish reasonable contingency and business continuity plans;

f) on an annual basis, perform an independent review, in accordance with established audit procedures and standards, of its current systems technology plans and whether there are appropriate processes in place to manage the impact of change in technology on the exchange and parties interfacing with exchange systems. This will include an assessment of CDNX’s controls for ensuring that each of its systems that support order entry, order routing, execution, data feeds, trade reporting and trade comparison, and capacity and integrity requirements, complies with sub-paragraphs (a) to (e) above.  Senior management will conduct a review of a report containing the recommendations and conclusions of the independent review; and

g) promptly notify the Commission of material systems failures and changes.

31. For CDNX securities listed on a system operated by the TSE, CDNX will be considered to have met the requirements set out under sub-paragraphs a) to f) of paragraph 30 if the TSE meets the equivalent requirements contained in the OSC recognition order.

Change in Operations or Ownership

32. CDNX will not cease to operate or suspend, discontinue or wind-up all or a significant portion of its operations, or dispose of all or substantially all of its assets, without

a) providing the Commission at least six months prior notice of its intention; and

b) complying with any terms and conditions the Commission may impose in the public interest for the orderly discontinuance of its operations or the orderly disposition of its assets.

33. CDNX will obtain the approval of the Commission before it or the TSE completes any transaction that would result in CDNX ceasing to be controlled by the TSE.

34. CDNX will not cease to be a wholly-owned subsidiary of the TSE without CDNX:

a) providing the Commission at least three months prior notice of its intention; and

b) complying with any terms and conditions the Commission may impose in the public interest.

Due Process

35. In connection with giving access to its facilities, CDNX will ensure that

a) its requirements, the limitations or conditions it imposes on access, and the decisions it makes to deny access are fair and reasonable; 

b) the parties are given notice and an opportunity to be heard or make representations; and

c) it keeps a record, gives reasons and provides for appeals of its decisions.

Information Sharing

36. CDNX will share information of a regulatory nature and will otherwise co-operate with the Commission and its staff, other exchanges and self-regulatory organizations recognized in Canada, and Canadian regulatory authorities responsible for the supervision or regulation of securities, subject to the applicable privacy or other laws about the sharing of information and the protection of personal information.

Additional Information

37. CDNX will file any information required under the rules adopted to implement the alternative trading system proposal.

Commission Approval

38. When seeking the approval of the Commission under these terms and conditions, CDNX will comply with the procedures established from time to time by the Commission for the joint regulatory oversight of CDNX.

Summary of Comments on TSE acquisition of CDNX

List of Commentors

1. Woodstone Capital Inc.

2. CDNX Listed Company Association

3. British Columbia and Yukon Chamber of Mines

4. Roche Securities Limited

Comments

General

• The bid was fair. When a stock is illiquid, there is no better way to gauge the fairness of an offer than to consider what a wiling buyer is prepared to pay. The fairness of the offer is further established by the fact that a majority of the shareholders of CDNX have accepted the TSE offer.
• There is a worldwide move towards mergers, consolidation and globalization, and Canadian institutions will have to undergo this process if they want to compete internationally. As a regional exchange, CDNX would find it more and more difficult to survive in the future. The commentor foresees volumes declining and only a limited ability to do new financings. However, as the venture capital arm of the senior Canadian exchange, CDNX would have the necessary standing to fulfill its objectives, free of the stigma that has been attached to it.
• There is agreement with the President of the TSE who said: “This combination helps the Canadian capital markets as a whole. Listed companies and brokerage firms at both exchanges will benefit from reduced costs, improved efficiencies and a stronger presence in key regional centers right across Canada. Our businesses will bring a unified approach to issuers, helping a company through each stage of its growth. The TSE’s relationship with institutions, and its international profile, will immediately provide valuable exposure for Canadian venture companies.”
• The TSE will increase the profile of CDNX both in central Canada and with international investors. This should increase liquidity in the small cap market, which is a necessary requirement to attract institutional investors.
• The ASC and BCSC should reject the TSE take-over of CDNX unless effective measures are in place to preserve and grow the junior market in the new CDNX or to actively facilitate the development of new junior exchanges.
• There is a strong concern that the TSE board lacks understanding of the junior market and that regulatory policy only appropriate for senior issuers will be applied to junior issuers. This will increase the costs of compliance for junior companies and provide no offsetting benefits. 
• There is a real potential for seriously undermining the effectiveness of junior markets because of the risk of centralizing our stock markets in a jurisdiction that does not understand the fundamentals of public risk capital and the ever-growing burden of regulation and policy. Representation of the junior issuer community in governance is important to ensure the changes resulting from centralization will not result the junior market disappearing.
• The growing regulatory burden has increased the cost of raising capital by 20 to 30% and this trend will increase with a TSE take-over.
• Retail speculators need increased opportunities to participate in early stage issuers. This will require greatly simplifying the regulatory process for acceptance of public offering documents.
• A majority of listed companies surveyed agreed that:
  • There will be greater market liquidity
  • The reputation of the junior market will be enhanced
  • National harmonization will be beneficial to junior issuers
• A majority of listed companies surveyed disagreed that:
  • Regulatory functions will be more efficient
  • Junior capital markets will be strengthened
  • Costs to juniors will be less
  • Regional services will be improved

Corporate Governance

• The Advisory Committee to the TSE board will be an extremely important link to the TSE board and the only avenue for small issuer representation. The actions and authority of the Advisory Committee will be crucial to fostering and maintaining junior market interest.
• It is important that 25% of the TSE board will be comprised of persons with junior market expertise.
• The Alberta Securities Commission (ASC) and the British Columbia Securities Commission (BCSC) should make a strong statement that the TSE board recognizes the mandate of the Advisory Board.
• The ASC and BCSC should support a request that one third of the members of the Advisory Board be members of management of actual issuers.
• The proposed Advisory Board should actively promote policies that encourage both retail and institutional investors to invest in CDNX listed securities. Consideration should be given to having individuals on the Advisory Board that are actively working in the investment dealer community but aren’t members of the TSE.

Service Levels

• There is a concern that regional CDNX corporate finance services will be reduced. Having to deal with non-local offices will increase costs for issuers and the risk of inappropriate regulation in areas where a centralized corporate finance office may not be familiar with local business issues. There is a suggestion CDNX can address these concerns communicating openly and having practices to benchmark its performance.

Others

• It is important to maintain and, if possible, further facilitate small financings and reactivation of small companies.
• It is important to preserve the broad private placement exemptions under British Columbia securities legislation, otherwise the attractive investment climate for junior issuer will continue to decline even if other market conditions were to strengthen.
• There is no incentive for investment dealers to participate in junior markets and the take-over will exacerbate the problem.