Stock exchange cracks down after stream of ‘shell’ companies make it to market

A good flow of “shell” companies with little cash, assets or business plans marched onto public markets in 2014 and early last year. Now, under pressure from regulators, the Canadian Securities Exchange is taking significant steps to tighten that access.

An overhaul of the CSE’s listing requirements is in progress, caused by negotiations with regulators, primarily in the Ontario Securities Commission, sources say. The marketplace watchdogs are understood to have been alarmed through the proliferation of those shells and the danger they might pose to investors.

The CSE, an upstart rival towards the Toronto Stock Exchange, plans to introduce strict working capital requirements for newly listed companies, effectively pushing empty shells from the picture. The proposals, published late recently and today available to public review and input, would also require firms to achieve “appropriate business milestones” before gaining a listing. 

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“There continues to be strong feedback that although people such as the approach we take to regulation, they’d feel well informed when the bar was higher in route in and when there were continuing listing requirements too,” Richard Carleton, the CSE’s chief executive said in an interview.

The exchange took steps last year to staunch the flow of questionable firms to the public market, but that failed to placate all of the concerns of regulators.

Shells were going public around the CSE via a court-controlled legal manoeuvre known as a plan of arrangement. If you take this route, these were able to get listed without having to file a prospectus or just being subject to any significant vetting by regulators.

Clean shell companies with public listings fetch the amount of an income, ostensibly to entrepreneurs seeking to build them into viable companies. But the OSC was uneasy because it had little understanding of these firms before they obtained public listings and have become readily available for trade by retail investors.

Regulators this past year halted exchanging a minimum of two firms that went public through plans of arrangement coupled with unexplained run-ups in their share prices.

“I can easily see why they’re cracking recorded on it in the sense that you’ve got listed companies without real businesses,” said Kriszti