The Ontario Securities Commission (OSC) recently published OSC Staff Notice 51-725 Corporate Finance Branch 2014-2015 Annual Report. The report provides an overview of the OSC Corporate Finance Branch’s operational and policy work over the course of the fiscal year ended March 31, 2015 and provides helpful guidance to market participants.
The OSC reviewed roughly the same number of prospectuses in fiscal 2014 as they did in fiscal 2015. However, two new industries accounted for an increasing share of the OSC’s prospectus reviews: medical marijuana and gaming. OSC staff found that reporting issuers in these industries required enhanced disclosure as a result of certain novel considerations that ought to be disclosed to investors including regulation and differences in legal status across jurisdictions. The OSC also noted that they received the first IPO prospectus filed by a special purpose acquisition corporation in fiscal 2015 and that four SPAC IPO prospectuses have been filed to date. We discussed SPACs in a prior post and note that Stikeman Elliott LLP is the only law firm to have acted as legal advisors on all four Canadian SPACs filed to date.
The OSC staff made the following notable observations in connection with prospectus filings and suggested that in some of these cases pre-file discussions with staff may be appropriate:
- Significant acquisitions. OSC staff noted that when issuers are raising funds to finance an acquisition that would be the issuer’s primary business or a material portion thereof, they must consider whether the financial statement disclosure required for a significant acquisition is sufficient for the prospectus to contain full, true and plain disclosure. OSC staff recommend that issuers consider whether more than two years of financial statements are necessary and whether more than one of those years ought to be audited.
- Primary business. OSC staff stated that an issuer completing an IPO must provide three years of financial history disclosure (two years if a venture issuer) even if such financial history spans more than one legal entity. In addition, the financial history of businesses acquired or that will likely be acquired may need to be provided as a “primary business” where the businesses are in the same business as the issuer. In this respect, OSC staff note that there is no significance test for acquisitions that fall within the definition of “issuer” in item 32.1 of Form 41-101F1 Information Required in a Prospectus. Further, if the acquired business is over 100% when compared to the primary business of the issuer, regulators may expect disclosure of the financial history of the business even though it is not the same as that of the issuer.
- Promoters. Where a promoter exists at the time of an IPO, OSC staff state that issuers should consider whether the promoter’s relationship with the issuer has changed at the time of a subsequent offering. OSC staff state that the reference to two years in s. 58(6) of the Ontario Securities Act does not mean that promoter status automatically terminates after two years. The promoter analysis must be conducted on a case by case basis.
- Use of proceeds and financial condition of issuer. OSC staff note that an important part of prospectus reviews is considering an issuer’s financial condition and intended use of proceeds. A prospectus must disclose how the issuer intends to use the proceeds of the financing and the issuer’s financial condition, including liquidity concerns.
- Insider reporting. The Annual Report contains detailed guidance for correctly completing insider reports. Notably, an issuer’s profile supplement must show all securities and related financial instruments held by reporting insiders. Note that under the Ontario Securities Act, a related financial instrument is “an agreement, arrangement or understanding to which an insider of a reporting issuer is a party, the effect of which is to alter, directly or indirectly, the insider’s: (a) economic interest in a security of the reporting issuer, or (b) economic exposure to the reporting issuer”. In addition, OSC staff stated that deferred share units, restricted share awards and other similar securities must be created on SEDI under the category of “issuer derivative” and not “equity”.
For further information, please consult OSC Staff Notice 51-725.