OSC Proposes New Rules to Restrict Short Selling Ahead of Offerings of Public Securities

On June 6, 2025, the Ontario Securities Commission (OSC) proposed amendments (Proposed Amendments) to OSC Rule 48-501 Trading during Distributions, Formal Bids and Share Exchange Transactions (OSC Rule 48-501) that will, if enacted as proposed, 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 sold short from buying securities in the offering, unless an exemption is available.

The OSC notice describing the Proposed Amendments, which generally will align the Canadian rules with United States rules, in particular Rule 105 of Regulation M under the U.S. Securities Exchange Act of 1934, states that impetus for the Proposed Amendments was provided by the Final Report of the Ontario Minister of Finance’s Capital Markets Modernization Taskforce, issued in 2021 (Taskforce Report). The Taskforce Report (1) stated that short selling in connection with prospectus offerings and private placements, and in particular bought deals pre-arranged with hedge funds who short sell shares before announcement, makes pricing and completion of securities offerings more difficult, (2) expressed support for a new requirement that does not require regulators to prove intent, and (3) stated that such a requirement would be preferable to rules against market manipulation and insider trading (which are difficult to prove due to statutory requirements to show either intent or knowledge) in the circumstances of short selling in advance of an offering.

Although not mentioned in the OSC notice, additional impetus may have been provided by the Ontario Capital Markets Tribunal’s recent decision in Cormark Securities Inc. (Re), which upheld the propriety of triangular hedging transactions that many market participants previously viewed as impermissible. In Cormark, the Tribunal held that sales of free trading equity securities of a public issuer, borrowed from an insider of the issuer and sold into the market by an unregistered market participant, where the stock loan was collateralized solely with the same number and class of securities purchased contemporaneously from the public company in a private placement did not (1) constitute an indirect offering of securities to the public, made without the benefit of a prospectus, and (2) engage the Tribunal’s public interest jurisdiction.

The decision in Cormark diverges significantly from U.S. case law and Securities and Exchange Commission guidance on commercial arrangements that purport to transform resale restricted securities into free trading securities, and market participants have observed that the decision could result in an uptick in Canadian adoption of equity offering structures that previously may have been considered (by some) unacceptable from a regulatory risk perspective.

The Proposed Amendments would add a new section to OSC Rule 48-501 to provide that

“[A] person or company must not directly or indirectly purchase a short sale restricted security that is being sold in a distribution for cash if the person or company made a short sale of a security of the same class as the short sale restricted security during the short sale restricted period.”

A “short sale restricted security” is an equity security other than an exchange-traded fund.

The “short sale restricted period” is the period commencing five business days before pricing of the relevant securities offering and ending at pricing of the offering.

Exemptions from the general prohibition are available for:

• Purchases made in at-the-market offerings
• Acquisitions of securities upon conversion or exchange of convertible or exchange securities pursuant to section 2.42 [Conversion, exchange or exercise] of National Instrument 45-106 Prospectus Exemptions
• Where the short seller buys in (in bona fide open market transactions) at least the entirety of its short position no later than the business day prior to pricing of the offering

The new prohibition prohibits a purchase of securities in an offering by a short seller even if (1) the short seller had no prior knowledge of the offering, (2) the offering did not constitute a “material fact” or “material change” concerning the issuer, and (3) the short sales had no impact on the market price of the securities sold.

The notice for the Proposed Amendments seeks comments from market participants generally and on a list of specific questions. The comment period ends on September 3, 2025.

For more information, please contact the author or any other member of our Capital Markets group.