The Canadian Securities Administrators (CSA) have proposed changes to the Complementary policy to National Instrument 41-101 General prospectus requirements (NI 41-101CP), aimed in particular at reducing the uncertainty surrounding the obligation to include the financial statements of certain acquired companies in an IPO prospectus. Specifically, Form 41-101A1Information required in a prospectusrequires issuers to include in a detailed prospectus the financial statements of companies acquired in the previous three years, or proposed for acquisition, if a reasonable investor would consider the principal business of the issuer to be the acquiree or proposed to be acquired (the Core Business Requirements). Major business requirements also apply to securities laws or stock market rules that require disclosure at the prospectus level. It is important to note that the core business requirements currently include very limited objective financial thresholds or guidance on the materiality level of the acquisition or proposed acquisition that would trigger financial statement disclosure requirements. This has generally resulted in the need to seek a waiver and inconsistent waiver granted in various jurisdictions.
According to the CSA, issuers who prepare an IPO prospectus often consult with CSA staff prior to filing the case on whether an acquired business should be considered part of the issuer’s core business and, therefore, financial statements are required. with regard to these companies. This often results in additional delays and costs for issuers and, as noted above, the application by CSA members of primary operational requirements has at times been inconsistent across jurisdictions. For example, the Ontario Securities Commission (OSC) interpretation of financial statement requirements in Form 41-101A1 has become broader than that adopted in other jurisdictions, requiring that audited financial statements be included in a prospectus for acquisitions that might otherwise not be considered material. . This OSC interpretation was formally expressed in OSC Staff Notice 51-728 Corporate Finance Department 2016-2017 Annual Report, which stipulated that an IPO prospectus must include “a three-year financial history [.] of the company in which the investors invest, even if this financial history spans several legal entities during the three-year period [including] the financial history of the companies acquired or likely to be acquired if these companies are part of the same main activity as that of the issuer. “
As such, and in response to comments received as part of the CSA Burden Reduction Initiative, the proposed amendments to NI 41-101CP would include:
- additional guidance on interpreting core business requirements, including illustrative examples. For example, amended NI 41-101CP would stipulate that historical financial statements would be required not only when an acquisition exceeds the materiality threshold of 100%, but also when an acquisition that falls below the materiality threshold of 100. % changes the main activity of the issuer. ;
- additional indications concerning the replaced entities;
- guidance and examples of when additional information may be required in order to meet the requirement for full, true and clear disclosure. The amended NI 41-101CP would address a wider range of exceptional scenarios where issuers could be required to include additional financial information; and
- guidance on determining what constitutes a business in the context of acquired mining assets. Specifically, the acquisition of mining assets would not be considered a business requiring financial statements when the acquisition was (a) an arm’s length transaction, (b) no other asset was transferred and no other liabilities were not assumed, and (c) there had been no exploration, development or production activity on the mining assets in the three years (two years for a venture or venture issuer) preceding the date of the preliminary prospectus.
According to the CSA, the proposed changes are expected to result in a significant reduction in pre-filing applications and the time spent by issuers and their advisers. It is important to note that the documents appended to the proposed amendments suggest that the CSA have decided not to pursue a “hedging model” whereby a certain percentage of the issuer’s activities, including past acquisitions, should be included in audited financial statements included in an IPO Prospectus. Review of these hedge calculations and related analysis has often been the focus of pre-filing for issuers that had made multiple acquisitions in the last three fiscal years preceding the IPO.
The CSA are accepting comments on the proposed changes until October 11, 2021.
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