TSXV Tier 1, Tier 2 and NEX: What the Labels Mean

Introduction

When a junior lists on the TSX Venture Exchange (TSXV), the exchange places it on a tier. Most investors never look at the label, but it decides which set of exchange standards the company must meet, and a move between tiers, or off to the NEX board, is information worth reading.

This guide explains the three labels in plain terms. It avoids quoting specific thresholds because the exchange updates its policies; the current versions are in the TSXV Corporate Finance Manual. For how the TSXV fits alongside the Toronto Stock Exchange and the CSE, see our guide to Canada's three exchanges.

A tier is an exchange classification. It is not a rating.

Two Tiers

TSXV Policy 2.1 sets out the initial listing requirements. In the policy's own words, Tier 1 is "the Exchange's premier tier and is reserved for the Exchange's most advanced Issuers," while Tier 2 "is the tier where the majority of the Exchange's listed Issuers will trade."

The exchange assigns a tier based on standards that look at a company's historical financial performance, its stage of development and its financial resources at the time of listing. The requirements also differ by industry segment, so a mining company is measured against mining criteria rather than technology or real estate criteria.

For mining issuers, the gap between the tiers shows up in a few places:

• The property. Tier 1 asks for a material interest in a more advanced property than Tier 2 does. Tier 2 can accept an exploration property without reserves, provided it has prospects.
• Working capital. Tier 1 issuers need enough money to fund a longer period after listing than Tier 2 issuers.
• Public distribution. Tier 1 requires a larger public float and more public shareholders.

The exchange can also place a company on a different tier from the one it applied for.

Staying Listed

Listing is not a one-time test. TSXV Policy 2.5 sets continued listing requirements that relate, in the policy's words, to "the financial situation, business activity and shareholder distribution of Issuers." In general terms they cover:

• Working capital. Enough money on hand to keep operating for a period.
• Activity. Evidence that the business is doing something. For a resource company, that means spending on exploration or development.
• Public distribution. Enough shares in public hands, held by enough shareholders, for a market to exist.
• Assets and operations. The exchange can act if a company substantially impairs its main assets or operations, or becomes insolvent.

A Tier 1 company that stops meeting the Tier 1 standards can be moved to Tier 2. A Tier 2 company that stops meeting the Tier 2 standards receives notice and a period to fix the problem. If it does not, the exchange may transfer it to NEX or suspend and delist it. The policy also allows the exchange to act without notice in some cases, such as a company abandoning its assets or going bankrupt.

Moving up works the other way. A Tier 2 company whose management believes it meets all the Tier 1 initial listing requirements can apply to graduate to Tier 1. The exchange may still refuse.

The NEX Board

NEX is a separate board of the TSX Venture Exchange. The NEX Policy describes it as designed for companies that were listed on the TSXV or the Toronto Stock Exchange and failed to meet ongoing listing standards, and as a trading forum for publicly listed shell companies.

Typical reasons a company ends up on NEX include running out of money, dropping its properties, or winding down its business while keeping the listing. The NEX Policy sets basic conditions to trade there, including being in good standing, being a reporting issuer and having a minimum number of public shareholders.

A NEX listing can still have value to someone. A clean shell with shareholders and a listing can be used for a reverse takeover by a private business that wants to become public. That is a reason NEX shells sometimes attract interest, and also a reason to read any NEX company's filings carefully, because the business it ends up owning may be entirely different from the one it started with.

Getting Back

NEX is not necessarily the end. The TSXV has a policy on reactivating NEX companies, and the NEX Policy requires a company that meets the Tier 2 requirements on a sustainable basis to move back to the TSX Venture Exchange or be delisted from NEX. A reactivation usually comes with a new business, a financing, or both.

At the other end of the ladder, a TSXV company that outgrows the venture market can apply to graduate to the Toronto Stock Exchange, which has its own listing requirements. Graduation is covered in our exchange guide.

What the Labels Do and Do Not Tell You

They tell you:

• Which set of exchange standards the company must meet.
• Something about stage and resources. A Tier 1 mining issuer has met tougher property and financial tests than a Tier 2 issuer.
• When something has changed. A move down a tier, a notice from the exchange, or a transfer to NEX is a signal to read the filings.

They do not tell you:

• Whether a company's projects are any good.
• Whether its management is capable, or its shares fairly priced.
• How risky the shares are. Tier 2 includes everything from early-stage explorers to well-funded developers.

What to Check

• The current tier. Exchange bulletins and the company's disclosure state it.
• Any exchange notices. A bulletin about tier changes, a cure period or a transfer to NEX explains what standard was missed.
• Working capital. The latest financial statements and MD&A on SEDAR+ show how much money is left and how fast it is being spent. The cash runway calculator can help frame the numbers.
• Activity. For an explorer, look for actual exploration spending, not just announcements.
• For a NEX company, the plan. Any reactivation or reverse takeover should be described in a news release and, where required, a filing statement or circular.

None of this is advice. Read the filings and speak to your own adviser before making any decision.