Proposed Policy and Rule Changes – Policy 1, Policy 2, Policy 4, Policy 5 and related forms, and Rule 1-101, Rule 11-102 and Rule 11-103 Notice and Request for Comments

October 23, 2009

The Board of Directors of CNSX Markets Inc. (the “Board”) has passed a resolution to amend Policy 2 – Qualifications for Listing and add new Policy 10 -Specialist Securities as well as to amend Rule 1-101 – Definitions, Rule 11-102 – Qualification for Alternative Market and Rule 11-103 – Access by Eligible Clients to the Alternative Market, subject to Ontario Securities Commission approval, following public notice and comment. Blacklined copies of the proposed amendments to Policy 2, consequential house-keeping amendments to forms 1a, 1b, 2a, 2b and 4, Policies 1, 4 and 5, and the text of new Policy 10 are attached as Appendix A and blacklined copies of the proposed Rule changes are attached as Appendix B.

The Board has determined that the proposed amendments are in the public interest and have authorized them to be published for public notice and comment. Comments should be made no later than 30 days from the date of publication of this notice and should be addressed to:

CNSX Markets Inc.
220 Bay Street, 9th Floor
Toronto, ON
M5J 2W4

Attention: Mark Faulkner, Director, Listings and Regulation
Fax: 416.572.4160
Email: Mark.Faulkner@cnsx.ca

A copy should be provided to the Ontario Securities Commission (OSC) at the following address:

Market Regulation Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto, ON
M5H 3S8

Attention: Manager, Market Regulation
Fax: 416.595.8940

I. Proposed Changes

A. Policy Changes

CNSX Markets is proposing amendments to Policy 2 – Qualifications for Listing. The first group of amendments restructures the policy to remove listing criteria for specific products from the main text and include them as appendices. As a result of the changes, new Appendices have been added with specifics relating to equity and debt securities. In the future, should CNSX plan to add new products, additional Appendices will be submitted for approval. Consequential amendments are proposed to Policies 4 – Corporate Governance and Miscellaneous Provisions and 5 – Timely Disclosure, Trading Halts and Posting Requirements and the related Forms, and a new Policy 10 – Specialist Securities adds guidance for securities with special, non-financial requirements. As part of the review of the policies, CNSX Markets also took the opportunity to make certain house-keeping changes to Policy 1 – Interpretation and General Provisions, such as those to reflect the name changes of the exchange and IIROC.

Other amendments to Policy 2, described below, are being proposed to clarify and codify a number of existing practices and procedures and include a “Full, True and Plain Disclosure” requirement and a further requirement for Issuers to take all reasonable care to ensure that any information provided to CNSX or otherwise made available to CNSX is not misleading or deceptive and does not omit anything likely to affect the import of the document or information provided.

B. Rule Changes

The proposed rule amendments relate to: 1) changes to the definition of “Alternative Market Security” in Rule 1-101 – Definitions to include a CNSX-listed security, plus a consequential change to Rule 11-102 – Qualification for Alternative Market, which sets out the securities that qualify for trading in the Alternative Market (Pure Trading); and 2) the addition, in Rule 11-103 – Access by Eligible Clients to the Alternative Market, of a new category of eligible client that may access the Alternative Market.

II. Rationale

A. Policy Changes

The addition of specific listing criteria for different products will provide better guidance for issuers seeking to list securities other than equity securities, and specific disclosure requirements more appropriate to each type of product will ensure that investors and other market participants have access to relevant disclosure. Inclusion of the criteria and requirements in Policy 2 and its Appendices will ensure transparency of CNSX requirements. The changes to Policies 4 and 5 resulted from the review and restructuring of Policy 2 and the focus on differentiating by security type.

The requirements for different types of securities were established based on CNSX Markets’ approach to offer competitive, less restrictive service while still requiring issuers to meet minimum standards.

To be eligible for listing, an issuer must still be a reporting issuer or the equivalent in a jurisdiction in Canada.

B. Rule Changes

Initially, the Alternative Market was developed to provide competition in the Canadian markets and, consequentially, was focused on the securities listed on other exchanges. CNSX Markets has since considered that there may be benefits to having the ability to list a security on CNSX and trade it on the Alternative Market facility. To allow this flexibility, we are proposing the amendments to Rule 1-101 and Rule 11-102.

The change to Rule 11-103 relating to access to the Alternative Market by eligible clients is being proposed to better reflect the range of clients of CNSX Dealers to include all clients that meet the spirit of the “eligible client” definition due to sophistication, financial assets and/or size and to bring the definition in line with that in place at the other exchanges.

III. Description of the Policy and Rule Changes

A. Policy Changes

The amendments include a restructuring of Policy 2, some additional requirements, new Appendices, and consequential amendments to Policies 4 and 5 and to certain forms.

1. Structure

We propose to move the product-specific eligibility requirements out of the main body of the Policy and into Appendices, as follows:

a) Appendix A - Equity Securities
b) Appendix B - Debt Securities

2. Basic Qualifications for Listing

• The current eligibility criterion in Policy 2-1.1 that an issuer must be a reporting issuer or the equivalent in a jurisdiction in Canada remains unchanged.
  
• Proposed new Policy 2-4.1 codifies a previously-understood requirement that all securities for which a listing is sought should be fully paid and non-assessable.
  
• Proposed new Policy 2-7.2 provides that all documents must be posted in the data format prescribed by CNSX from time to time. This will enable CNSX to prescribe that filings be made in the emerging XBRL format at a suitable future date. Policy 2-7.2 (e) has been amended to require the posting only of an index of all documents comprising the Issuer’s SEDAR record, for the previous two calendar years, rather than the posting of all the documents and an index of those documents.
  
• Proposed Policy 2-9.1(e) now provides a CNSX Issuer need not post a public document submitted to SEDAR on the CNSX website if identical disclosure has already been posted in a CNSX Form.
  
• Proposed Policy 2-12 entitled Transfer and Registration of Securities was moved from Policy 4. The out-dated requirement to maintain transfer facilities in the City of Toronto has been removed and the proposed amendment states only that the Issuer must maintain transfer and registration facilities in good standing where the securities of the Issuer are directly transferable and that certificates must name the cities where they are transferable and must be interchangeably transferable and identical in colour and form with each other.
  
• Proposed Policy 2-13 entitled Share Certificates was moved from Policy 4. It states that share certificates must bear a valid CUSIP number but the amendments remove the out-dated requirement that all certificates must be printed by a recognized bank note company or its affiliate or other security printer which has a contractual affiliation with a recognized bank note company.
  
• Proposed Policy 2-14 entitled Book-Based System has been moved from Policy 4.
  
• Proposed new disclosure requirements:




• Policy 2-15 entitled Full, True & Plain Disclosure is a new provision that reinforces the securities regulatory requirements for disclosures. In particular, that the Listing Statement filed with CNSX must, as an overriding principle, contain such information which, according to the particular nature of the Issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the Issuer and of its profits and losses (and of any guarantor) and of the rights attaching to such securities, and must set out such information in true and plain English.
  
• In addition, new Policy 2-9.1(g) requires that an Issuer must take all reasonable care to ensure that any statement, document or other information provided to CNSX or which is made available to CNSX or posted by the Issuer is not misleading, false or deceptive and does not omit anything likely to affect the import of such statement, document or other information.

3. Appendix A - Equity Securities

There are no significant changes proposed to the current minimum requirements. The proposed changes, which serve to reinforce the current standards in practice, are as follows:

• The public float must be at least 500,000 freely-tradeable shares worth at least $250,000 (currently $50,000) and consisting of at least 150 public holders. We propose to raise the dollar value minimum requirement to better reflect our experience over the last five years and the public float requirement of equivalent exchanges in Canada.
  
• An Issuer must have “demonstrable revenue from operations” (previously “cash generating capacity”) or have working capital of $100,000 ($50,000 if recently listed on another exchange).
  
• An Issuer identified as a “thin float” Issuer will have an identifying marker added to its disclosure on the CNSX.ca website.
  
• In section 1.7 of Appendix A to the Policy, investment companies (which are no longer referred to as “Merchant Banking” or “venture capital” companies in the Policies) must have minimum net assets (currently “net tangible assets”) of $2 million, at least 50% of which has been allocated to at least two specific investments, or $4 million.
  
• The Builder’s Share guidelines and escrow policies, which had been previously approved in principle by the Board and published in a Regulatory Notice, have now been included in Appendix A of the Policy with no significant changes to those requirements. A minor change is to alter the definition of Builder Shares to shares issued for “less than $0.02 per share (previously it was “$0.02 or less”). Paragraph 2.8(c) of Appendix A to the Policy now explicitly states that CNSX, in its sole discretion, may impose escrow arrangements that are in addition to those required by National Policy 46-201 Escrow for Initial Public Offerings, or consider different proposals such as an “earn-out” escrow, on a case-by-case basis.
  
• The list of documents required to be filed with a listing application has been amended so that the existing requirement to post legal opinions on good standing, etc., on the CNSX website has been deleted because legal counsel do not generally consent to such publication of their opinions. The requirement to file two copies of the Listing Statement and other forms, etc., has also been changed to a single copy as most documents are now submitted electronically.

4. Appendix B - Debt Securities

For the purposes of this Appendix, “debt securities” includes bonds, debentures, notes, Eurobonds, Medium Term Notes, Sukuk (Islamic bonds) and any other fixed income securities that CNSX deems to be debt securities.

• An Issuer of debt securities must have net assets of at least $1 million or, where the Issuer is a special purpose vehicle or a holding company that does not meet this requirement itself, CNSX may consider the assets of an underlying entity. The Issuer must appoint and maintain a payment agent acceptable to CNSX. We propose this low minimum requirement to attract issuers to list their debt issues, and thus create a more open and transparent secondary trading market for debt securities in Canada, while ensuring that the issuer has a credible level of net assets.
  
• There are additional requirements in the case of asset-backed securities, including a requirement that a trustee or other independent representative must be appointed to represent the interests of the holders of the asset-backed securities and the trustee or an independent custodian must hold the underlying assets and all money and benefits flowing from the assets to the Issuer or the holder of the asset-backed securities. In drawing up these requirements we have studied the requirements of several international exchanges that list debt securities (including TSX, the Bermuda Stock Exchange, the Cayman Islands Stock Exchange, the Dubai International Financial Exchange, the Irish Stock Exchange, the London Stock Exchange, NASDAQ and NYSE).
  
• Where an Issuer issues debt securities of the same class on a regular basis under an issuance programme, sections 2.4 and 2.5 of Part B of Appendix B enable an Issuer to make an application for the pre-approval of the listing of a specified number of securities, which may be issued in a particular case, and to list tranches subsequently issued pursuant to the programme on the basis of a short form pricing or “term sheet”. The debt securities to be issued under an issuance programme must be identical, except in respect of their designation (they may be different series), the term of the securities (the maturity date may vary), the amount of the tranche (within the overall maximum amount of the programme), and the yield (the coupon rate may vary). Securities that are not identical may not be issued under a programme and will require a separate application.
  
• Under section 2.6 of Part B of Appendix B, CNSX reserves the right to impose additional requirements on an issue made under an issuance programme, including imposing a requirement to make a new application in respect of that issue, if it considers that the issue does not fall within the scope of the programme.

5. Policy 4 – Corporate Governance

Under the proposed changes, the transfer and share certificate policies previously set out in Policy 4 (as referred to above) have been moved into Policy 2 .

6. Policy 5 - Timely Disclosure, Trading Halts And Posting Requirements

• Proposed new Policy 5-13.2 indicates that, in respect of every debt security listed on CNSX, the CNSX Issuer must post the following documents (rather than the longer list of documents required for equity securities):
  
  a) every document required (i) to be filed with any Commission for a jurisdiction in which the issuer is a reporting issuer or equivalent, (ii) to be delivered to shareholders of the Issuer, or (iii) to be filed on SEDAR - concurrently or as soon as practicable following the filing with the Commission or SEDAR or the delivery to shareholders ; and
  
  b) an annually-updated Listing Statement completed to reflect all changes to information appearing in the previously posted Listing Statement - concurrently with the Issuer's audited annual financial statements.
  
  
• Proposed new Policy 5-14 provides for certain Continuous Disclosure Obligations. Generally, paragraph 14.1(a) provides that a CNSX Issuer must disclose to the public as soon as reasonably practicable any information relating to the Issuer or any of its subsidiaries that has come to the knowledge of the Issuer, if the information:
  
  i) is necessary to enable the public to appraise the financial position of the issuer and its subsidiaries;
  ii) is necessary to avoid the creation or continuation of a false market in the securities of the Issuer; or
  iii) might reasonably be expected to materially affect market activity in or the price of the securities of the Issuer.
  
  
• Proposed Policy 5-14.1, paragraph (b), states that paragraph (a) does not apply to information that:
  
  i) affects the market or a sector of the market generally; and
  ii) has already been made available to the investing public.

7. Special Requirements – e.g., Islamic Securities

A proposed new Policy 10 states that where the securities to be listed are held out as being in compliance with specific, non-exchange mandated requirements, the Issuer must disclose how it has been established and, if relevant, who has established that the securities are in compliance with the stated requirements.

For example, in the case of securities that are held out as being in compliance with Shari'ah, this requirement is met if the issuer:

a) appoints a Shari'ah Supervisory Board, with at least two members, to advise in respect of Shari'ah compliance, on all aspects of the offering, including advice on the information to be provided;
b) discloses the names of the members of the Shari'ah Supervisory Board and their respective qualifications, experience and expertise in Islamic jurisprudence and Islamic finance; and
c) ensures that that the Shari'ah Supervisory Board issues a Shari’ah pronouncement in writing that is signed by the Chairman and at least one other member of the Shari'ah Supervisory Board.

In drawing up these requirements we have studied the requirements of other exchanges that list Islamic securities (including the Dubai International Financial Exchange and the London Stock Exchange).

8. House-keeping changes

The term “CNQ” has been changed to “CNSX” throughout to reflect the name change in November, 2008.

The following changes have been made to the definitions in Policy 1:

“CNSX” and the “Exchange” both now mean the Canadian National Stock Exchange operated by CNSX Markets Inc.
“CNSX Board” has been amended to reflect the fact that the Board is CNSX Markets Inc.’s Board.
“CNSX Issuer” and “Issuer” both mean an issuer which has its securities qualified for listing on the CNSX System or which has applied to have its securities qualified for listing on the CNSX System, as applicable.
“IIROC” means as the Investment Industry Regulatory Organization of Canada, which replaces references to the IDA and Market Regulation Services Inc., as applicable.
“Listing” has been added to better reflect the change from the original form of the organization as a quotation and trade reporting system and means the grant of a listing and quotation of, and permission to deal in, securities on CNSX and the CNSX System, and “listed” and “quoted” shall be construed accordingly.
“Market Regulator” has been updated to refer to IIROC.
“UMIR” was amended to reflect the name changes – i.e. that the Universal Market Integrity Rules are administered by IIROC and adopted by CNSX.
In Policy 1-1.4 reference to a marker on the stock symbol in the CNSX Marketplace has been deleted.
Also, in section 5.2 under Appeals of Decisions, the reference to the “Listing Advisory Committee” has been amended to refer to the “Listing Committee”.

9. Forms

By way of further house-keeping amendments, the Listing Statement (Form 2A) has been updated to conform with the Long Form prospectus requirements of National Instrument 41-101 General Prospectus Requirements as set out in Form 41-101F1 Information Required in a Prospectus.

As a matter of practice, CNSX allows an Issuer that is preparing a Listing Statement to use the contents of a current prospectus by preparing a table of concordance which clearly states under each heading in the Form where the appropriate disclosure can be found within the prospectus. Accordingly, the updated Form 2A does not mirror the following requirements of the long form prospectus (since these disclosures are made in the prospectus):

a) the information regarding the distribution of securities supported by a prospectus such as the plan of distribution and the earnings coverage ratio of the securities being distributed;
b) the detailed requirements for financial statements - CNSX allows an issuer to rely on the most recently filed audited financial statements if it is already a reporting issuer, or the financial statements set out in the prospectus if it is not; and
c) terms like “IPO Venture” and “junior issuer” are excluded, but the disclosure requirements are the same in the Form 2A and Form 41-101F1.

Details of the specific disclosure requirements for Mineral Projects and Oil & Gas Operations have been removed from the body of Form 2A and added as Appendices A and B respectively. Each new appendix provides a list of the items that must be included within the Form 2A.

Minor conforming amendments, which can be seen in the blacklined versions of the Forms attached to this notice, have been made to Form 1A – Application Letter, Form 1B - Listing Application, Form 2B – Listing Summary and Form 4 – Listing Agreement. By way of house-keeping amendments, Form 1A has also been amended to delete an outdated reference to 4-character trading symbols, and to replace an incomplete picklist of newswire services with a simple request for the name of the service used.

B. Rule Changes

1. Alternative Market Security

The current definition of an “Alternative Market Security” in Rule 1-101 is “…a security other than a CNSX-listed security that is listed on another Canadian stock exchange and approved for trading on CNSX” (emphasis added). We propose to change the definition to:

…a security that is listed on a Canadian stock exchange and approved for trading on the Alternative Market.

Rule 11-102(1) currently states that: “…CNSX may designate securities listed on another stock exchange recognized in a jurisdiction in Canada as eligible for trading in the Alternative market provided such securities are not suspended or subject to a regulatory halt” (emphasis added). We propose to replace “another” with “a” in that sentence.

2. “Eligible Client” definition

CNSX’s Rule 11-103 sets out the requirements for access by eligible clients to the Alternative Market. We propose to add the following category of eligible client, replacing the existing paragraph (i) with the following and making existing paragraph (i), paragraph (j):

…a client that is a non-individual with total securities under administration or management exceeding $10 million, where the client is resident in a jurisdiction that falls within the definition of “Basle Accord Countries” as defined in the General Notes and Definitions section of the Joint Regulatory Financial Questionnaire and Report…

IV. Impact of the Proposed Changes

The proposed changes to both the Policies and Rules will not require any technological changes or development by CNSX Dealers or issuers currently listed on CNSX. There will be no direct costs associated with compliance.

A. Policy Changes

The addition in the Policies of the product-specific listing criteria and disclosure requirements for securities other than equity securities will increase general awareness of the full range of listing services provided by CNSX and offer better guidance on the minimum requirements for each type of security to listing applicants (and more easily allow CNSX to introduce specific requirements for other security types in the future).

It is not anticipated that the increase in minimum float value for equity securities will have any noticeable impact on issuers.

B. Rule Changes

The changes to the rules relating to Alternative Market securities expand the range of securities that may be traded in the Alternative Market by adding those of another recognized exchange – CNSX. There are no additional obligations or costs imposed on CNSX Dealers or Issuers, but the change could provide additional competition in the listings area, which could provide benefits to both groups. There will be minor costs to service providers in adding new securities to those eligible for trading on the Alternative Market, but these are the same as for any new securities added at present.

V. Consultation

A. Policy Changes

In determining the suitability of the listing criteria for specific securities CNSX consulted with issuers and conducted a review of listing requirements of a number of exchanges (both in North America and elsewhere), as noted above. No formal consultation was conducted for the restructuring of the Policy or the consequential and minor changes.

B. Rule Changes

Some consultation was carried out with a small group of specialty issuers (on a confidential basis) to understand their needs in the current environment. Flexibility was a key factor, and this led, in part to the proposed changes to the definition of “Alternative Market Security”.

There were no consultations in relation to the changes to the list of eligible clients as the proposal simply mirrors a new category of eligible client already in place in Canada.

VI. Alternatives

A. Policy Changes

The purpose of the proposed structural changes is to provide more clarity for each type of security to be listed. As such, the only significant alternatives considered were the minimum thresholds for listing, and the reporting requirements for each type of security. Minimum standards were established based on CNSX’s goal to provide a well regulated market with less restrictive access requirements.

B. Rule Changes

The proposed changes to the Rules are minor, technical changes necessary to broaden the provisions to accommodate future business strategies. No alternatives were considered.

VII. Comparable Rules

A. Policy Changes

Other Canadian stock exchanges have specific criteria for the types of securities to be listed. Furthermore, other exchanges have more specific criteria for equity securities based on the line of business of the issuer.

B. Rule Changes

The proposed changes to Alternative Market Security do not have comparable provisions in the rules of other stock exchanges because of the unique structure of CNSX Markets’ facilities – i.e., that the Alternative Market is a facility of the exchange. Unlisted trading privileges are allowed in US markets pursuant to the Securities Exchange Act of 1934, subparagraph 12f-1(A), which states generally that: “…any national securities exchange, in accordance with the requirements of this subsection and the rules hereunder, may extend unlisted trading privileges to (i) any security that is listed and registered on a national securities exchange…”

The additional category of eligible client is the same as that added by the TSX and TSXV previously.

Request for comments

CNSX Markets specifically requests comments on the following areas:

1.    The specific eligibility criteria and disclosure requirements for each of the new products set out in Appendices A and B to Policy 2.

2.    For which, if any, additional products should CNSX consider introducing product specific Appendices.