COATS to become junior stock exchange: Task Force

After nearly two years of consultation with the securities industry, the 10-member task force recommends an “evolutionary approach” to the improvement of Ontario’s unlisted stock market, known as COATS.

The task force points out that “COATS has yet to realize its full potential,” and recommends a series of improvements.

Introduced in April, 1986, COATS is a computerized information network designed to encourage over-the-counter trading, and help unlisted companies raise capital by making them more visible.

“There was no strong consensus for a new revolutionary approach to changing COATS, so a middle ground solution was sought,” said task force chairman Ermanno Pascutto at a news conference when the report was released.

Rather than move COATS immediately to the status of an independent self regulating stock exchange, the task force recommends an incremental approach to upgrading the system. Maritime provinces

A computerized system such as COATS could be used to serve Maritime provinces that lack a stock exchange of their own, Pascutto said. “But, we’re also mindful of the fact that if successful, COATS would be in competition with the country’s other four exchanges, and Canada already has a proliferation of stock exchanges,” he said.

Since it functions via computer terminal and the telephone system, COATS can serve a local market in provinces without stock exchanges, while at the same time operating on a national basis.

The task force report identifies a number of factors that have hindered the development and expansion of COATS. Among these are the public’s general perception that COATS is not as efficient, accurate, fair and competitive a market as it could be.

According to the report, COATS lacks many of the desirable attributes of a listed market, such as a self-regulatory organization dedicated to its successful operation. Another factor is the inability of unlisted securities to qualify for certain investment and income tax benefits.

A major recommendation of the task force is that the operation of COATS be immediately transferred to a voluntary operating committee comprised of representatives from the securities industry, issuers of COATS securities, the TSE, and the OSC.

The operating committee would take over the OSC’s current operation of COATS and attempt to improve it as recommended by the task force. Three sections

The report recommends the operating committee restructure COATS into three sections or levels.

The first section would be a “listed” section in the same fashion as securities are listed on NASDAQ in the United States. Listing would be limited to Ontario and other Canadian reporting issuers.

It also proposes that application be made to recognize the first section under the Income Tax Act of Canada as a “prescribed stock exchange,” which would qualify issuers listed on it for investment by RRSPs and other tax shelters.

A major shortcoming of the current system, the report says, has been the ineligibility of COATS securities for RRSP investment and flow-through share offerings. In the past, issuers have tended to list their securities on exchanges rather than keep them on COATS.

One of the primary reasons why most Ontario junior companies become listed is to benefit from the flow-through share provisions of the Income Tax Act.

The second section would be for other Canadian and international stocks, while the third would be for the balance of publicly-traded securities

The task force also recommends that automated trading should be implemented on a gradual basis, and in consultation with the securities industry, COATS issuers, and investors.

Fees in relation to COATS would also increase to be more comparable with those of other Canadian stock exchanges. The increased amount of such fees will be held in trust for the eventual establishment of a COATS self regulating organization.

COATS is expected to generate about $450,000 of revenue per year, comprised of first section listing fees of $1,000 per issuer for about 80 issuers, and aggregate transaction and data fees of about $370,000.

Copies of the COATS Task Force Report are available upon written request to the Secretary of the OSC or in person at the Toronto office of the OSC.

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