CHAPTER 11:

FINANCING AND LISTING SECURITIES

Topic One: Types Of Business Structures

1. Three Types of Business Organizations.

A. Sole proprietorship.

(1) The sole proprietor has:

(a) Sole ownership.

(b) Total liability.

(c) Taxation of business earnings at the owner’s personal

tax rate.

(d) Limited resources, typically.

B. Partnership.

(1) The partnership has:

(a) Two or more contributors to the business.

(b) More resources than a sole proprietorship.

(c) Liability determined by the type of partner:

i. General partners who have equal and total

liability. They are involved in the everyday

operations of the business.

ii. Limited partners who have limited liability.

Limited partners cannot be held liable if they do

not participate in the management of the company.

C. Corporation or Incorporated business.

(1) The corporation has:

(a) A structure that makes it a separate legal entity.

(b) Ownership that is either private or public.

i. Private corporations have restrictions on the right

of shareholders to transfer shares, a limit of 50

shareholders, and cannot sell shares to the

public.

ii. Public corporations have none of the restrictions

of private companies. All companies whose

shares are listed on a stock exchange or trade

over-the-counter are public companies.

(d) Assets that are owned by the company, not the

shareholders.

(e) The need to pay taxes and the ability to sue (or be

sued) in the courts.

(f) Greater access to capital which makes it easier for a

corporation to expand than a proprietorship or

partnership.

(g) Shareholders that are not liable for the debts of the

corporation beyond the amount of equity that they have

in the company.

Topic Two: Incorporated Businesses

1. Incorporation.

A. A charter is used to specify the structure of a company (number of

shares issued, etc.). It is issued by the government after the necessary

documents for incorporation are filed, depending on whether it is to be a

provincially or federally incorporated company.

(1) The charter can take the following forms:

(a) Letters patent

(b) Memorandum of association

(c) Articles of incorporation

(2) The charter contains the corporate name (including the word

limited, corporation, or incorporated, or their abbreviations),

date of incorporation, registered office, authorized capital, the

characteristics of the shares, and any restrictions.

B. Determining where to incorporate depends on the laws of incorporation

for federal versus provincial jurisdiction, the type of business, and where

the business will be active.

(1) Federal incorporation is carried out under the Canada Business

Corporations Act (CBCA).

(a) A federally incorporated corporation can do business in

any province subject to each province’s general

application rules.

(2) A provincially incorporated corporation can do business in its

home province, but might need additional charters to operate in

other provinces.

C. Whether a company is incorporated federally or provincially can affect

a company in the following ways:

(1) Method of incorporation.

(2) Provincial tax payable.

(3) Corporate names available.

(4) Requirements for directors’ residency.

(5) Age restrictions of the directors

(6) Meeting requirements of the board

(7) Required number of directors

(8) Required financial statements

Comparison of Corporate Structures

Sole proprietorships (s.p.)

Partnerships Corporations (publicly traded)

Ability to Finance

Based on the financial resources of the s.p., and success of the business. Growth is for the most part self-funded, unless business loans are taken.

Based on the financial contribution of the partners; outside funding must be sought through bank loans or the addition of new partners.

Easily done by issuing shares and debt. However, only those companies that appeal to the capital markets will find those markets receptive to new issues. Thus, their growth can be easily financed.

Continuity of Existence

None after death of s.p., unless the business is bought and continued by its new owner.

Terminated by winding-up or dissolution.

Unlimited, except by events such as acquisition or bankruptcy.

Financial Liability

Limited to the financial resources of the s.p. and the profits that reside in the business.

Limited to the financial resources of the partners. Liability will be determined by whether a partner is a general partner and involved in the day to day operations. General partners have equal and total liability. A limited partner does not participate in daily operations and has limited liability to the extent of the partner’s investment.

Limited to amount spent by shareholders to buy shares.

Legal Liability The owner of a s.p. can sue and be

A partner cannot sue a partnership; neither can

A corporation can be sued as a separate

sued and will be personally liable.

a partnership sue a partner.

entity. Shareholders are protected from suits brought against the corporation. A shareholder can sue a corporation, and that corporation can sue the shareholder.

Operational Issues

S.p.s operate independently and report to no one.

Partners run the show. Shareholders with voting rights can exercise some control over corporate issues and the board of directors. There are no laws sanctioning how a corporation organizes its operations. The organizational structure is influenced by the specific corporation’s size, industry, and location.

Regulation Unregulated. Regulated by the extent of the partnership agreement.

Highly regulated, with ever-increasing new levels of rules to be met.

Taxation Business profits become the income of the s.p., and are taxed at his or her personal income- tax rate. Some business deductions are allowed.

Business profits shared by the partners.

Corporations are taxed at a lower tax rate than individuals, and are permitted many deductions not available to individual taxpayers. Dividends issued by corporations represent after-tax distributions, and because they are taxed in shareholder’s hands, they represent an example of double taxation.

Transfer of Ownership

Business must be sold; s.p. can be challenged to find a buyer willing to pay a fair price.

Partnership interest or partnership property that becomes ―available,‖ due to death or departure of a partner, must be bought out by the remaining partnership.

Typically highly liquid.

2. Public and Private Corporations.

A. At the time of incorporation, a general bylaw is created to outline the

rules of conduct for the corporation.

(1) Directors pass bylaws; shareholders must give their approval of

the bylaws.

(2) Bylaw provisions deal with:

(a) Shareholder and director’s meetings.

(b) Director election, removal, and qualification.

(c) Officers’ appointments, duties, and remuneration.

(d) Dividend declaration and payment.

(e) The fiscal year-end date.

(f) Document signing authority.

B. Ownership of shares in a company gives the shareholder the right to

vote and contribute to the control of the company (e.g., shareholders

vote to elect the directors).

(1) In order to vote at a meeting, a shareholder must own shares

registered in his or her own name or have a completed proxy.

(a) A proxy form and information circular are sent to

shareholders with notice of an shareholder’s meeting.

i. A proxy gives someone the right to vote on behalf

of a shareholder.

ii. A proxy is good for one meeting and any

adjournments of that meeting.

iii. Proxies may be revoked at any time.

iv. The management of public companies can solicit

proxies to vote on behalf of shareholders; so too

can shareholders assign their proxies to non-

management. If management does not control

enough votes, there is an opportunity for

challengers with proxy support to take over and

remove the existing management in a proxy fight.

(2) Different classes of shares may have different voting privileges

and some shares may have no voting rights.

C. Business affairs determined at annual meetings include:

(1) Electing directors.

(2) Appointing auditors.

(3) Distributing financial statements and the auditor’s report.

(4) Considering other affairs.

D. When a corporation is in financial difficulty voting shareholders may put their

shares into a voting trust (held by a trustee) in which a few people control the

voting privileges until the difficulties are resolved.

(1) Under the voting trust agreement, the shareholders maintain all

shareholder privileges except voting rights.

3. The Structure of the Organization.

A. Directors.

(1) Any person who is of the age of majority, of sound mind, and

not an undischarged bankrupt can qualify as a director.

(2) Corporations are often required to have a certain number of

directors who are not officers or employees of the corporation

or its affiliates.

(3) Directors’ duties:

(a) Appoint and supervise corporate officers.

(b) Appoint those responsible for signing or banking.

(c) Authorize contracts, and approve budgets and

expansion plans.

(d) Decide when to issue shares.

(e) Declare dividends and other profit distributions.

(4) Directors are:

(a) Required to act in the best interests of the corporation.

(b) Liable for illegal acts of the corporation that are

committed with directors’ knowledge and consent.

(c) Liable for dividends that are improperly declared.

(d) Liable for wages of the employees of the corporation

and government remittances.

(e) Liable for any misrepresentation contained in a

prospectus and other statutory filing, such as takeover-

bid circulars or issuer-bid circulars.

(f) Required to exercise care, diligence, and skill.

(5) Directors and officers may also be subject to regulatory

sanctions under securities legislation, or prosecution under

criminal law.

B. Officers.

(1) Officers are employees of the corporation who have been

appointed by the directors to run the business day-to-day.

(2) Typically, officer titles and responsibilities are:

(a) Chairman of the Board

i. Elected by the board of directors and may have

any/all the duties of the corporation’s president or

officers. May be the chief executive officer (CEO).

ii. Chairs meetings of the board and has a great deal

of influence on the management of the corporation.

(b) President

i. Appointed by the board of directors.

ii. Has authority over other officers and heads of

divisions.

(c) Executive Vice-President

i. Second in command to the president.

ii. May have the title of Chief Operating officer (COO).

(d) Vice-Presidents

i. Appointed to lead specific operations of a

corporation (e.g., a corporation could have a vice-

president of sales, a vice-president of IT, etc.)

Topic Three: Government Financing

1. Overview.

A. Financing and underwriting refer to the process by which a company or

government raises new capital by:

(1) Selling debt securities.

(2) A private placement or offering.

(3) An initial public offering (IPO).

(4) A secondary offering (or additional issue).

B. The investment dealer’s finance department consists of government

finance and corporate finance.

2. Canadian Government Issues.

A. The government finance department of an investment firm assists

federal, provincial, and municipal governments to:

(1) Be aware of market conditions for new issues.

(2) Advise the issuer on:

(a) The size, coupon, currency, and timing of a new issue.

(b) Whether the issue should be domestic or foreign.

(c) The need for a new issue vs. re-opening a previous

issue.

Note: When the text uses the term ―government finance department,‖ it

means the government finance department of an investment firm. Do

not confuse this with the finance department of the government.

B. New issues that are approved by the finance minister and the cabinet

are issued through the competitive tender system or the non-competitive

tender system.

(1) Competitive Tender System:

(a) Used for most securities issued on a regular basis (e.g.,

T-bills).

(b) The Bank of Canada receives competitive bids from

those who want to sell the bonds.

(c) Only government securities distributors may submit

competitive tenders; these institutions include Schedule

I and II banks, investment dealers, and foreign dealers.

i. Government securities distributors can submit up to

seven competitive bids.

ii. Primary dealers meet or exceed proscribed levels

of sales activity for government securities. The

auction limit for primary dealers is 40% of the total

issue.

(d) Competitive tenders are in multiples of $1,000, with a

minimum of $100,000.

(e) Bids state the desired yield for the issue.

(2) Non-competitive Tender System:

(a) Non-competitive tenders are auctions in which bonds

are sold at the auction average.

(b) Government securities distributors can submit a single

non-competitive tender. A non-competitive tender is

desirable because it is less risky.

(c) The upper limit on non-competitive tenders is $3 million.

They are allotted by the Bank of Canada in multiples of

$1,000, with a $1,000 minimum.

(d) Not all bids are successful, because the total bids

received are generally greater than what will be

awarded.

(e) Bonds are allocated starting with the bidder with the

lowest yield; all successful bidders pay a price based on

their bid. Non-competitive bidders pay a price based on

the average yield of the successful bidders.

(f) The federal government holds quarterly auctions on its

benchmark 2-, 5-, and 10-year bonds and semi-annual

auctions for its 30-year bonds. This is to ensure

transparency in its debt operations.

C. Provincial and Municipal Issues.

(1) Provincial direct bond and guaranteed bond issues are usually

sold at a negotiated price through a fiscal agent.

(2) A group of investment dealers and banks called a syndicate

underwrites the issues and advises and manages the process,

the timing, the pricing, and the characteristics of the issues via a

fiscal agreement.

(a) Each fiscal agreement lasts for one year, during which

time the syndicate manager continuously advises the

issuer.

(3) A provincial government bond is a direct obligation of the

province and a bond issued by a provincial Crown corporation is

guaranteed by the province (e.g., Ontario Hydro).

(4) Institutional and government pension managers are the main

purchasers of municipal issues.

(5) Municipal bond yields are based on the tax-generating potential

as well as the industrial base of the municipality.

Topic Four: Corporate Financing

1. Overview.

A. Corporations issue debt and equity to increase working capital, repay

bank loans, purchase assets, or expand production.

B. Key decisions with regard to a new issue include:

(1) What types of securities to issue.

(2) Whether the issue should be a private placement or a public

offering.

(3) The issue price.

(4) The coupon rate or dividend.

(5) The fee charged to the corporation by the underwriters.

(6) When the issue will come to market.

(7) How the issue will be split between institutional and retail

buyers.

C. The competitive tender system (like that used by the federal

government) is sometimes used for new issues. A negotiated offering

is more commonplace.

(1) In a negotiated offering, the terms of the issue (e.g., price,

special features, etc.) are negotiated between the corporation

and the dealer.

2. Equity Financing.

A. The corporate charter authorizes the creation of common and preferred

shares. Those shares in turn create the equity capital (or capital stock)

of the business.

B. Authorized shares are the maximum number of shares the corporation

can issue.

C. Issued shares are the authorized shares that have been issued.

D. Outstanding shares are the issued shares in the hands of

shareowners. When a corporation redeems or purchases any of its

issued shares, outstanding shares decrease.

(1) The current market price x outstanding shares determines the

market capitalization of the corporation.

E. Public float is outstanding issued shares that are available for public

trading. This does not include the large blocks of shares that are held by

institutions.

(1) A small float results in price sensitivity when there is a large

volume of trades.

F. Shares can have a stated value for accounting purposes, and it is

usually the price of the shares when issued.

(1) The par value of a share is its stated face value normally

expressed as dollars per share (e.g., $5 per share). There is no

relationship between share par value and market value.

(2) "No par value" shares (NPV) do not have a stated face value.

Equity shares must be without par value.

3. Debt Financing.

A. As we have seen, when a company needs capital it can issue debt

securities such as bonds, typically mortgage bonds, or debentures.

Topic Five: The Corporate Financing Process

1. Overview.

A. When choosing the lead dealer for an issue, the corporation will

consider:

(1) The dealer’s reputation

(2) Advisory services provided (e.g., recommended timing of the

issue, pricing, the distribution network, and after-issue support).

B. The investment dealer prepares for a new issue by completing a due

diligence report on the industry, the company's position and operating

performance within the industry.

2. The Dealer’s Advisory Relationship with the Corporation.

A. The corporation relies on the dealer’s guidance and the dealer develops

a specific interest in the corporation.

B. A dealer that is the broker of record is the official advisor to the

corporation and may have the right of first refusal on new financings.

C. The lead dealer will ensure that a new issue is consistent with the firm’s

capitalization (i.e., debt and equity) and that its provisions will not be

unduly restrictive to corporate operations.

D. Debt will be recommended for issue when:

(1) There is a need for lower cost financing, since interest paid on

money borrowed to acquire income-producing assets is tax-

deductible.

(2) The earnings generated by cash from a debt issue will be higher

than the cost of servicing the debt, and therefore there is a net

gain for the business by issuing debt.

(3) There is a need to preserve equity, in which case debt will be

issued.

(4) A merger or acquisition is not contemplated it could be hindered

by the pledge of assets associated with a bond.

(5) The market will react favourably to a bond secured by assets or

a debenture that provides a higher interest rate because assets

are not pledged.

(6) A corporation needs the flexibility provided by a debenture in

which no assets are pledged.

E. Common shares will be recommended for issue when:

(1) There is a desire for a company not to pledge assets.

(2) Obligations associated with debt issues and preferred shares

(dividends) are to be avoided.

(3) The increase in equity can support more debt.

(4) Shareholders approve of a dilution to equity represented by the

issuance of new shares.

(5) Market value of the company is more readily established to

support a merger or acquisition.

(6) The improvement in credit rating provided by equity, because

there is a bigger cushion against insolvency and more stability

in the company’s income stream.

(7) No possibility for default if a dividend is missed; missing an

interest payment on debt can trigger default.

(8) There is a wish to effectively transfer business risk from the

company to the shareholders. The company is not required to

repay shareholder capital or obligated to pay interest on this

money.

F. Preferred shares are recommended when:

(1) A stable debt-equity is to be maintained, since preferred shares

are classified as equity.

(2) There is a possibility for default if debt was to be issued.

Missing an interest payment on a bond or debenture has more

serious implications than missing a dividend payment.

(3) Greater flexibility is needed because assets are not pledged.

(4) There is a possibility that shares will need to be redeemed.

(5) The company has sufficient profits to ensure continued payment

of dividends with after-tax income.

G. Protective provisions enhance the marketability of a security for companies in a

weaker financial position.

Protective Provisions

Type of security Protection guaranteed in

Bond Trust deed

Mortgage bond Deed of trust and mortgage

Debenture Trust indenture

3. The Method of Offering

A. Issues may be distributed as a private placement or a public offering.

(1) A private placement is sold to large institutional investors and

does not require a formal prospectus.

(a) Without the usual requirements for a prospectus and

detailed public disclosure, the cost to distribute the

issue is reduced.

(2) A public offering is sold to institutions, retail investors, or both.

(a) A primary offering is a new issue of securities that is

offered for sale in the initial public offering (IPO) market.

(b) A secondary offering is the sale of previously issued

securities to the public by an investment dealer or

syndicate.

(c) Shares that are repurchased by their own company are

called treasury shares; they can be resold through a

secondary or treasury offering, and will increase shares

outstanding.

4. The Prospectus

A. A prospectus must be prepared for new issues to help prospective

investors make an informed decision.

(1) The prospectus must be delivered to the investor or his or her

agent no later than midnight on the second business day after

the trade.

B. The passport system is used, in which a prospectus must only be

approved by the principal regulator in the home jurisdiction of the dealer.

That decision will apply in all other passport jurisdictions.

C. A prospectus provides ―full, true, and plain disclosure of material facts

about the security being offered‖ by its issuing corporation.

D. Prospectuses contain financial and non-financial information, and

include (but are not restricted to):

(1) Details of the offering, including price and distribution.

(2) Use of the funds raised by the issue.

(3) Details on corporate operations, including history and directors.

(4) The risk and tax implications of the investment.

E. Prospectuses are issued in a preliminary and final form.

(1) A preliminary prospectus (called a red herring prospectus,

because its preliminary nature is declared in red ink on the front

cover) provides substantial information that will be included in a

final prospectus to allow the issuer to gauge public interest and

to satisfy disclosure requirements of regulators.

(a) May exclude some information (e.g., the price of the

shares) that has yet to be finalized.

(b) Names of those who have received the preliminary

prospectus are recorded.

(c) A greensheet is distributed by the dealer, for in-house

use only. It outlines the features of the issue for the

sales department to solicit interest.

(d) Between initial approval of the preliminary prospectus

and the final prospectus there is a waiting period of 90

days. Activities that further the issuance of the security

(e.g., entering into agreements for buying and selling)

are prohibited during this time.

(2) Once all the issues in the preliminary prospectus have been

resolved, a final prospectus must be mailed or delivered to each

purchaser.

(a) The final prospectus contains the complete details of

the security for sale.

(b) Securities offered for sale by the long prospectus are

considered agency deals or best-efforts underwritings in

which the dealer does not guarantee sales.

(c) When the final prospectus has been approved, the

issue is considered blue–skyed, and it may be publicly

distributed.

F. The Short Form Prospectus System is used by those that have

already made public distributions and are subject to continuous

disclosure requirements.

(1) The short form prospectus is restricted to issuers that:

(a) File information with SEDAR.

i. SEDAR is the System for Electronic Document

Analysis and Retrieval, operated by a subsidiary of

Canadian Depository for Securities Limited (CDS).

(b) Report in a minimum of one Canadian jurisdiction.

(c) Are up to date in all filings.

(d) Have filed financial statements and a current annual

information form in one jurisdiction where it is reporting

issuer.

(e) Is operational, with principal assets that are not cash or

cash equivalents.

(f) Trades or lists equities on the TSX, TSX V, or CNSX

(formerly CNQ).

(2) A short-form prospectus excludes much of the information that

is included in the long prospectus.

(3) This system is often used for bought deals in which a dealer

buys the whole issue directly from the issuer.

(a) The dealer assumes the risk for selling the issue.

(b) The saleability of the issue is enhanced by a small

spread between the price the dealer pays and the

selling price.

(c) When approval is received from the regulators, the

dealer sells the bought issue as a private placement—

or sells to the public, using a short-form prospectus.

5. Other Documents and Sales of the Issues.

A. Other documents and marketing materials for a new issue include:

(1) The Trust Deed, or Trust Indenture, when debt is issued.

(2) The underwriting or agency agreement, specifying the price to

the public and the dealer’s price.

(3) The Banking Group Agreement, which invites other dealers to

join in the offering. It allocates to:

(a) Its members for public distribution.

(b) Large institutional buyers that are exempt from

prospectus requirements.

(c) Others that include the selling group.

(d) The Selling Group Agreement that offers an additional

group of dealers the chance to buy the new issue for re-

sale to their clients.

(e) The final agreement on public and dealer issue prices.

B. The sequence of financing is:

issuer financing group banking group

(1) Within the financing group dealers receive an override in

payment for their advisory services for the issue.

(2) The banking group are those whose names appear in

tombstone advertisements in the financial press.

6. After-Market Stabilization.

A. The lead underwriter is responsible for after-market stabilization of the

market price of the offering and ,if this is to be provided, it must be noted

on the front of the prospectus.

B. There are three types of after-market stabilization:

(1) Taking a short position: The objective of the dealer is to ensure

the price of the security does not fall below the IPO price once

trading begins. It attempts to do this by an over-allotment

option (also called a green shoe option). The dealer receives

more shares to sell than required for the IPO. If the share price

falls below the IPO price, the dealer will buy shares in order to

cover its short position and increase share price. If the share

price is higher than the IPO, the dealer exercises the over-

allotment option and covers the short position by buying shares

at the original IPO price.

(2) Penalties: Distributing dealers are penalized if their customers

sell shares in weak issues shortly after the offer closes. The

lead underwriter will reduce future allotments of shares to that

dealer and the dealers will restrict future allocations to their IAs

who allowed their clients to ―flip‖ their shares.

(3) Repurchase: If the distribution is incomplete, the dealer bids on

shares at or below the offering price. This is the least common

of the three techniques.

Topic Six: Other Methods of Distribution

1. Overview.

A. A company already listed on the TSX venture exchange can issue an exchange

offering prospectus (EOP) or a statement of material facts instead of the

traditional prospectus.

2. Junior Company Distributions.

A. When a listed junior company wants to issue treasury shares to the

public, it must have a member firm act either as an underwriter or its

agent.

(1) The distribution is done through a stock exchange, and the price

is usually 10% to 25% below the current market price.

(2) The minimum requirement to be raised by the issue is $100,000

to $350,000.

3. Options of Treasury Shares and Escrowed Shares.

A. Junior companies often grant the underwriter a number of treasury

share options. This is done as an incentive for the underwriter to provide

risk capital as a principal rather than an agent.

B. These shares are escrowed (i.e., held by a trustee and cannot be sold

or transferred until allowed by the exchange or the securities

commission).

C. The value of these shares is linked to the underlying value of the

property of the junior company. For example, the price of shares of a

new mining company is linked to the expected future value of the

company.

D. An owner of these shares cannot sell them until a market develops in

the secondary market, but meanwhile has voting rights and can receive

dividends.

E. Escrowed shares are typically not released until an event occurs that

will support share demand and price (e.g., a successful exploration or

drilling program).

4. Capital Pool Company Program (CPC).

A. The CPC helps emerging companies obtain financing.

B. The type of company using a CPC has operating cash (or cash

available), but does not have assets, a business, or operations.

C. The company conducts an IPO and lists on the TSX. The issuer must

raise between $200,000 and $1.9 million in its IPO. The offer price can

range from $0.15 to $0.30 per share.

D. The CPC then uses these funds to acquire assets and qualify as a

regular issuer on the exchange.

E. The purchase of the assets or a business is called a qualifying

transaction (QT). Shareholders must approve the QT.

F. During listing and completion of the QT, the directors and senior officers

of the CPC must be Canadian residents, or have a close association to

Canadian or U.S. public companies, and have contributed a minimum of

$100,000.

G. If the issuer fails to complete the QT within 18 months, the TSX Venture

Exchange may suspend or delist its shares.

5. NEX.

A. NEX is a separate board of the TSX Venture Exchange that provides a

trading forum for:

(1) Companies that have fallen below the TSX Venture Exchange

listing requirements.

(2) CPCs that have not completed a QT.

(3) TSX issuers that do not meet listing requirements.

Topic Seven: The Listing Process

1. Overview.

A. An OTC grey market can develop prior to a security being listed on an

exchange between dealers wishing to execute clients’ orders and

support the issue.

2. Listing.

A. Advantages include:

(1) Increased visibility for the company and the enhanced visibility

of market performance that creates:

(a) Company prestige.

(b) Flexibility for future debt financing (convertibles, etc).

(c) Increased shareholder goodwill resulting from facilitated buying

and selling.

(2) Better credit.

(3) Easier valuation of securities for tax and estate planning.

(4) More information available to investors due to disclosure

regulations.

(5) Increased investor following.

B. Disadvantages of listing include:

(1) Additional controls on management (e.g., restrictions on internal

stock options and issuing shares for assets).

(2) Additional costs (e.g., listing and sustaining fees paid by the

company to the exchanges).

(3) Possible market indifference when a listed company cannot

sustain significant trading volume and market growth.

(4) Demands on management, who must disclose any material

changes (as per additional disclosure requirements for listed

trading) and keep analysts and institutional investors informed.

3. Listing Procedure for a Company.

A. To become listed, a company must complete and file an application with

an exchange. The application includes the following:

(1) The company’s charter.

(2) Any current prospectus.

(3) Profit and loss statements for the past three to five years, plus

other financial statements.

(4) Sample share certificates.

(5) Annual reports.

(6) The written opinion of the company’s legal counsel, verifying the

propriety of all company matters.

B. On completion of the application, the company will sign a Listing

Agreement outlining what it must do to keep its listing in good standing.

C. The exchanges have listing committees to approve applications. Upon

approval, there is a formal announcement to exchange members and

the public.

(1) Not all applications are approved.

D. A listed company is required to:

(1) Submit yearly and interim financial reports as well as other

corporate reports to the stock exchanges.

(2) Notify the exchanges about dividends or other distributions.

(3) Notify the exchanges of any stock options for employees,

underwritings, or the sale or issue of treasury shares.

(4) Notify the exchanges of proposed material changes in the

business or affairs of the company.

4. Withdrawing Trading Privileges.

A. An exchange may withdraw a listed security’s trading and listing

privileges short-term or permanently. Permanent delisting is rare.

B. Temporary interruption of trading.

(1) Delayed opening.

(a) Trading in a security could be delayed before the

opening of trading to allow traders to sort out a large

accumulation of buy and/or sell orders.

(2) Halt in trading.

(a) A temporary halt in trading is often used to allow

significant news to be reported.

(b) Normally a halt in trading lasts less than one day.

(3) Suspension of trading.

(a) Trading may be suspended when company finances do

not meet requirements for trading or if the company fails

to comply with its listing agreement.

(b) Trading resumes when the company remedies the

deficiency in the time allotted by the exchange and to

the exchange’s satisfaction.

C. Cancelling a Listing (Delisting).

(1) A listed security may be permanently delisted at the request of

the company or by the exchange.

(2) A security could be delisted if:

(a) The listed company or security no longer exists (e.g.,

due to a merger).

(b) The company has no assets or is bankrupt.

(c) The distribution of shares in the hands of the public is

unacceptably low.

(d) The company has failed to comply with requirements to

remain listed.