Les Autorités canadiennes en valeurs mobilières (ACVM) ont mis à jour leurs indications portant sur les enjeux relatifs à la situation financière de l'émetteur et à la suffisance du produit du placement au moyen d'un prospectus. Ces indications arrivent à point nommé sur un marché canadien des premiers appels publics à l'épargne (PAPE) robuste.

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The Canadian Securities Administrators (CSA) have updated their guidance with respect to concerns regarding an issuer's financial condition and/or the sufficiency of proceeds in a prospectus offering, providing timely guidance in the context of a robust Canadian initial public offering (IPO) market.

Key updates include:

  • The CSA will generally consider the ability of the issuer to continue operations for the "short term" to refer to 12 months
  • Base shelf prospectuses may be inappropriate if an issuer lacks sufficient cash resources to continue operations for a "reasonable period", which the CSA will generally consider to refer to 12 months
  • Alternative financing arrangements should only be included in representations about ability to continue operations if there is certainty of proceeds

Prospectus Offerings in a Strong Market

According to BNN Bloomberg, 2021 has seen the busiest first-quarter Canadian IPO market in 15 years. These IPOs have been especially tilted towards the technology industry, where there is a particular tendency for high-growth companies to go public before achieving positive cash flow. In addition, as a result of recent market strength, issuers that may have historically considered the public markets to be an unattractive source of financing have been re-evaluating.

Against this background, it is perhaps unsurprising that on March 25, 2021, the CSA published CSA Staff Notice 41-307 (Revised) Concerns regarding an issuer's financial condition and the sufficiency of proceeds from a prospectus offering (the Staff Notice), reiterating and updating guidance previously published in 2012.

The Staff Notice provides guidance on how the CSA will interpret longstanding statutory powers. Under Ontario's Securities Act (the OSA), the Ontario Securities Commission (OSC) may only refuse to issue a receipt for a prospectus either (a) on specific grounds provided in the OSA, or (b) where it appears to the OSC that it is not "in the public interest" to issue a receipt. Among the specific grounds are:

  • where the proceeds of the offering payable to the issuer and other resources of the issuer will be insufficient to accomplish the purpose of the issue stated in the prospectus, or
  • where an issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of the issuer (among others).

Securities legislation in the other Canadian provinces and territories generally contains provisions having similar effect.

Updated Guidance

The Staff Notice states that a prospectus must contain clear disclosure of how an issuer intends to use the proceeds of an offering, as well as the issuer's financial condition, including any liquidity concerns. However, it notes that disclosure alone may not be sufficient to mitigate receipt refusal concerns.

The CSA may consider anticipated proceeds inadequate in certain circumstances, including where proceeds are raised for a specific purpose but do not address the issuer's short-term liquidity requirements. Issuers with active operations should have the "ability to continue operations for the short term," which—in an important update for 2021—the CSA now state will generally be considered to refer to 12 months (though "the length of time an issuer with active operations will be able to continue operations will vary").

The Staff Notice then offers guidance across five key areas of focus for prospectus reviews.

1. Missing information regarding offering amount and pricing

The CSA will require information regarding the size of the offering to assess "whether the sufficiency of proceeds receipt refusal provision is applicable and whether it is in the public interest for the decision maker to issue a receipt."

If a preliminary prospectus is filled with the offering amount and pricing information bulleted, the CSA will issue a comment that they require a reasonable opportunity to review a blackline of the draft form of final prospectus, which they suggest is a minimum of two business days before filing of the final materials. They may also request a copy of any green sheets (and/or similar marketing materials).

2. Offering structure

The CSA will review the overall structure of the proposed offering in the context of the issuer's financial condition, and may require changes to the structure to address concerns regarding financial conditions.

As a result of amendments to the prospectus rules in 2013, the Staff Notice now reminds issuers that the long- and short-form prospectus rules require certain disclosure of how proceeds will be used at different thresholds where there is no certainty of proceeds. Given that a base shelf prospectus allows issuers to raise capital in increments for 25 months, the discussion of base shelf prospectuses now states that the CSA may consider the sufficiency of proceeds receipt refusal provision to be applicable where an issuer filing a base shelf prospectus does not appear to have sufficient cash resources to meet its short-term liquidity requirements for a reasonable period, which they will be consider to refer to 12 months.

3. Use of proceeds disclosure

The CSA will monitor use of proceeds disclosure closely. They note inadequate use of proceeds disclosure with respect to the principal purposes of the proceeds, business objectives and milestones, and negative cash flow from operating activities as specific areas of concern, and provide detailed guidance under each area. The Staff Notice reminds issuers that "for general corporate purposes" is not (on its own) considered adequate use of proceeds disclosure.

4. Risk factor disclosure

A prospectus should clearly disclose an issuer's going concern risk to allow readers to make an informed investment decision and provides detailed guidance for meeting this requirement. It also reminds issuers that risks must be ordered from most to least serious. This suggests by implication that if going concern risk is among the most serious risks an issuer faces, the CSA may have concerns if it is tucked away towards the bottom of the risk factors. The Staff Notice also reminds issuers of existing disclosure requirements where there is negative cash flow or no minimum offering size.

5. Representations to support ability to continue operations

The CSA may ask the issuer to provide a written representation of the number of months that it will be able to continue its operations given its financial condition. In conducting their analysis, the CSA will look at the certainty of proceeds (for instance, is the offering a "bought deal"?). The CSA will generally also request that this representation be disclosed in the prospectus. In addition, where an issuer's representations about its ability to continue as a going concern appear inconsistent with its financials, the prospectus, or otherwise unreasonable, the CSA may ask for a forecasted cash flow summary.

While there are numerous revisions in this section, of particular note, it now accounts for proceeds from alternative financing arrangements, stating they should only be included in analysis of future cash flows where there is certainty of proceeds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.