The Ontario Securities Commission (“OSC”) published for comment proposed amendments to OSC Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions and proposed changes to the related companion policy (collectively, the “Proposed Amendments”). The Proposed Amendments would prohibit any person or company that made a short sale of a security during the five business days prior to pricing of a prospectus offering or private placement of the same class of securities from participating in the offering unless an exemption is available. Comments are due by September 3, 2025.
Background
As we discussed in a previous post, Ontario’s Capital Markets Modernization Taskforce (the “Taskforce”) included a recommendation in its final report that the OSC adopt a rule prohibiting short selling in connection with prospectus offerings and private placements. The Taskforce noted that multiple stakeholders had advised that short selling in connection with prospectus offerings and private placements is making pricing and execution more difficult, particularly in bought deals pre-arranged with hedge funds that short the stock before the deal is announced. As the offering price is generally at a discount to the market price, investors may seek to profit through aggressive short selling prior to the offering to depress the price.
Proposed Amendments
While the Proposed Amendments would not prohibit or create new restrictions on short selling, they would prevent any person or company that made a short sale during the five business days prior to pricing of an offering of the same class of securities sold short from participating in the offering unless an exemption is available. Participation would be prohibited even if: (i) the short seller had no prior knowledge of the offering; (ii) the offering did not constitute a “material fact” or a “material change” concerning the issuer; and (iii) the short sales had no impact on the market price of the securities sold. As a result, the Proposed Amendments could apply to conduct that is not covered by insider trading and market manipulation rules.
For the purpose of the Proposed Amendments, a “short sale” is a sale of a security: (i) where the seller does not have title to the security; or (ii) that is settled or intended to be settled by delivery of a security borrowed by or for the account of the seller. “Pricing” is defined as the time that the amount of monetary consideration for the security is determined. An agreement on a formula to determine the monetary consideration at a future time is not pricing.
The Proposed Amendments are broadly aligned with the U.S. Securities and Exchange Commission’s Rule 105 of Regulation M: Short Selling in Connection with a Public Offering and would only apply to distributions made by Ontario reporting issuers.
Exemptions
The Proposed Amendments would not apply to:
- distributions of units of an exchange-traded fund;
- offerings of convertible or exchangeable securities where a person or company makes a short sale of a security underlying the convertible or exchangeable security;
- distributions that are exempt from the prospectus requirement pursuant to section 2.42 of National Instrument 45-106 Prospectus Exemptions;
- bona fide open-market purchases of securities sold in an at-the-market distribution;
- circumstances where the short seller makes bona fide open-market purchases of an equivalent quantity of the entire amount of the securities sold short no later than the business day prior to pricing; and
- short sales that occur after pricing of the offering
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