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A man works in the TMX broadcast centre in Toronto, May 9, 2014.Darren Calabrese/The Canadian Press

What was the most important TMX Group Ltd. development over the last week? It would be hard to argue against Monday's announcement that Lou Eccleston is set to be its next chief executive officer. But I would argue the most interesting announcement out of the TMX Group over the past seven days was the new beefed-up reverse takeover (RTO) listing rules for the TSX exchange. That announcement came out on September 25, and went into effect Wednesday.

First, a primer on the old regime. In a bulletin, Leslie McCallum, counsel in the corporate and capital markets practice with Torys LLP, explained how the TSX used to decide whether an individual transaction would be designated as a reverse takeover. Ms. McCallum wrote that a reverse takeover (or reverse merger, or backdoor listing) occurs "when an unlisted company acquires a listed issuer and the transaction will result in a change in effective control of the listed issuer and the listed issuer's security holders will own less than half of the securities, or have less than half of the voting power in the new entity."

So, it was strictly a mathematical formula. A guy (or gal) in a room, with a calculator. Under the new regime, the TSX will still look at the numbers and scrutinize things like how much shareholders of the targeted company are being diluted down. But a whole host of new factors will be looked at before a company can execute a reverse takeover on the TSX. The exchange will scrutinize what it is exactly that the company does, how big is it, what are the ins and outs of the capital structure, and who is running the show. If something smells fishy, the TSX can pull the plug.

Once a company gets approval to do a reverse takeover, the listing requirements are just as onerous as original listing requirements on the TSX. So why do an RTO and go through the screening process at all, if you are facing just as much hassle, paperwork and legal fees as doing an IPO? Why not just do an IPO? Well the objective of an IPO is usually two-fold; Raise money and get a stock market listing. But if a company has enough cash in the bank, all it needs is a listing. That's the beauty of the RTO. You get your listing but no need to shop around your IPO and try to convince investors to buy in. It's faster, and more expedient.

You may be surprised to learn that reverse takeovers are actually very rare on the TSX. The TSX only does 2-3 a year. They are much more common on the Venture exchange. The new rules apply to the TSX only.Ms. McCallum says the rule changes are meant to "preserve the quality of the marketplace and protect investors – the same objectives that motivated U.S. stock exchanges to toughen their listing standards in 2011 following accounting abuses at several companies who had accessed the U.S. capital markets via reverse mergers."

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