The Financial Post recently published an article called, “Caught in a web of spinoffs: Inside Canada’s expanding universe of ‘shell’ companies” by Barbara Shecter and Peter Koven. Many of you have probably already seen it, but if you haven’t, I highly recommend that you take a few minutes to read it.
The article discusses how micro-cap companies are spinning off other micro-cap companies as “ready-to-go” reporting issuers by using the legal mechanism of plans of arrangement (POA). By becoming reporting issuers in this manner, these micro-cap companies have not only avoided the trouble and expense of filing prospectus-level disclosure required by regulators but also circumvented regulatory scrutiny. These reporting issuers then become automatically eligible for listing on the Canadian Securities Exchange (CSE). This article begins by highlighting how one company “spawned” 50 spinoff companies, many of which are listed on the CSE.
In response to growing concerns that these micro-cap companies are obtaining listings without any operating business or discernable assets, the CSE published Notice 2015-003 Regulatory Guidance on Plans of Arrangement and Capital Structure on January 23, 2015 (the Notice). The Notice indicates that reporting issuers created through POA will be subject to greater scrutiny to ensure that their primary focus is to develop their stated business objectives rather than obtain a listing. The Notice also provides guidance and indicates that the CSE is considering policy amendments that would restrict the eligibility for listing of reporting issuers created through POA. Despite this, it is my understanding that micro-cap companies created in this manner are still obtaining listings on the CSE.
This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.