The Ontario Securities Commission (OSC) is publishing proposed amendments to a rule prohibiting any person or company who made a short sale of a security during the period commencing five business days prior to pricing of a prospectus offering or private placement of the same class of securities sold short from buying securities 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” (either, material information) concerning the issuer, and (iii) the short sales had no impact on the market price of the securities sold.
In recent years, there has been increased focus on the regulatory regime governing short selling in Canada. In 2021, the independent Capital Markets Modernization Taskforce (Taskforce), formed by the Ontario Minister of Finance, issued its Final Report, which contained a recommendation to prohibit short selling in connection with prospectus offerings and private placements.
The Taskforce found that short selling in connection with prospectus offerings and private placements, and in particular bought deals pre-arranged with hedge funds who short the stock before the bought deal is announced, makes pricing and completion of offerings more difficult.