The Ontario Securities Commission has opened a frontal assault on short selling that shadows equity raises. Draft amendments released would bar any investor who shorted a stock within five trading days of a deal’s pricing from buying that same security in the offering.
The rule mirrors the US regulation and is designed to stop what the regulator calls “pricing pressure” created when hedge funds short first and buy later at a discount.
“The short sale restricted period commences five business days before pricing and ends at pricing,” the proposal states. During that window, a “person or company must not directly or indirectly purchase” the new shares if they are still short. The restriction captures common shares but spares exchange traded funds.
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Toronto has wrestled with the practice since the province’s 2021 Capital Markets Modernization Taskforce warned that pre-arranged shorts make pricing and completion of securities offerings “more difficult.” The task force urged a ban that would not require regulators to prove intent, arguing it would work better than traditional manipulation or insider-trading cases.
Momentum intensified after the Capital Markets Tribunal’s 2024 Cormark Securities decision. The panel blessed a hedge in which a fund borrowed insider stock, sold it into the market, and covered with freshly issued private placement shares. Many dealers saw the ruling as a green light for similar trades, even though US courts have long rejected such structures.
The OSC now aims to narrow what had become a glaring cross-border gap.
The draft offers three carve outs: at-the-market distributions, bona fide conversions of convertible securities, and full position buy-ins completed no later than the day before pricing.
Crucially, the ban applies even if the short seller had no knowledge of the deal or no impact on the price.
Market participants have until September 3 to comment. After that, the commission is expected to move quickly but few doubt the rule will become law.
Information for this story was found via Blakes and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
