OSC proposes to restrict short sellers from participating in distributions of reporting issuers in Ontario

The Ontario Securities Commission (OSC) is seeking public comment until September 3, 2025, on a proposal (the Proposal) to prohibit persons and companies from participating in prospectus offerings and private placements made by reporting issuers in Ontario when such persons or companies recently sold short the equity security being offered. This restriction holds true even if (a) the person or company had, at the time of the short sale, no prior knowledge of the offering, (b) the offering did not constitute a material fact or material change concerning the issuer, and (c) the short sale had no impact on the market price of the security.

The Proposal responds to concerns that short selling in connection with prospectus offerings and private placements makes pricing and completing offerings more difficult. The Proposal does not prohibit or restrict short selling but does limit the ability of short sellers to participate in offerings of securities they recently sold short.

The Proposal was published on June 5, 2025, in a Notice of Request for Comment for proposed amendments to Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions and its companion policy, which can be found here. The Proposal implements a recommendation put forward by the independent Capital Markets Modernization Taskforce in 2021.

With the Proposal, the OSC aims to address two separate, but related concerns.

1. The first is where a person or company learns of an upcoming, unannounced financing and makes a short sale with the intention to close the position by buying back securities in the financing. Since these securities will almost always be priced at a discount to their market price, the profit is locked in. This type of short selling is not driven by any fundamental views on the price of the security and is instead an opportunity for riskless arbitrage that could affect the market price.
2. The second concern is short selling itself may bring down the market price and therefore lower the price at which securities are sold in the financing. 

While short selling is subject to a developed framework comprising Canadian securities legislation and Canadian Investment Regulatory Organization (CIRO) requirements, and there are rules such as prohibitions on market manipulation and trading on non-public material information that could apply to the conduct being restricted by the Proposal, the current regulatory framework does not completely address the concerns addressed by the Proposal. For example, a financing may not be “material information” that needs to be disclosed, in which case a short seller acting on information about the financing would not be in breach of relevant laws and rules. Further, even if certain instances of this behavior may technically be prohibited by current legislation, there can be obstacles to enforcement.  

Should the Proposal be enacted, a person or company will, subject to the exceptions listed below, be prohibited from directly or indirectly purchasing an equity security (other than a unit of an exchange-traded fund) being sold in a distribution for cash if that person or company made a short sale of a security of the same class during the period commencing five business days prior, and ending at, pricing (the Restricted Period). 

As noted above, this restriction holds true even if the person or company had no prior knowledge of the offering, the offering did not constitute a material fact or material change concerning the issuer, and the short sale had no impact on the market price of the security. The restriction does not apply to an offering of securities convertible or exchangeable into securities that were short sold.

The Proposal introduces a tailored definition of “short sale” specifically for Rule 48-501, which is broader than the corresponding definition in CIRO’s Universal Market Integrity Rules, and includes any sale settled or intended to be settled with borrowed securities even if the seller owns or is deemed to own the securities, through, for example, a long position or a securities lending agreement.

Exceptions to the restriction on short sellers purchasing securities in an offering during the Restricted Period include the purchase of the securities:

1. in an open-marketplace transaction on a marketplace in a distribution that is an at-the-market distribution;
2. in a distribution that is exempt from the prospectus requirements pursuant to section 2.42 of National Instrument 45-106 Prospectus Exemptions¹; 
3. following bona fide purchases of securities of the same class where the purchases are (i) at least equivalent in quantity to the amount of the securities sold short by such person or company during the Restricted Period; (ii) made in an open-market transaction on a marketplace; and (iii) made no later than the business day prior to pricing; and
4. in a separate account, where decisions surrounding securities transactions for each account are made separately and without coordination of trading or cooperation among or between the accounts.

The Proposal is broadly aligned with the US Securities and Exchange Commission’s Rule 105 of Regulation M: Short Selling in Connection with a Public Offering.

While the Proposal seeks to address specific concerns, the OSC has also identified that it comes with some potential risks, including the following:

1. issuers may be left with fewer potential buyers in a financing as certain short sellers will be excluded from participating or may choose not to participate;
2. persons or companies may have more difficulty closing short positions at an acceptable price;
3. institutional investors and traders may need to implement new policies and procedures to ensure compliance with the Proposal; and
4. dealers involved in offerings may have increased costs associated with monitoring participation of short sellers.

As noted, the Proposal is open for public comment until September 3, 2025.