The overview of the OSC Corporate Finance Branch’s operational and policy work over the course of the fiscal year ended March 31, 2020 provides helpful guidance to market participants.
The Ontario Securities Commission (OSC) Corporate Finance Branch has published its annual report (Report) which sets out the OSC’s expectations and interpretation of regulatory requirements with respect to capital raising and continuous disclosure matters. The Report is based on the work conducted by the OSC during the fiscal year ended March 31, 2020, particularly with respect to the 1,100 reporting issuers overseen by the OSC, as principal regulator. Notably, in fiscal 2020, 388 prospectuses were filed in Ontario, with mining, cannabis and real estate issuers being the most active. This represents a decline in the number of prospectuses filed in Ontario as compared to fiscal 2019, which the OSC attributes to a decline in offerings in the cannabis space and the impact of COVID-19 in early-2020. Based on market capitalization, issuers in the banking, mining and technology industries represented 49% of the reporting issuers under the OSC’s mandate.
Guidance for Issuers
As in year’s past, this year’s Report provides helpful guidance and reminders to market participants with respect to a number of topics:
Primary Business in an IPO
While the disclosure requirements for an issuer’s primary business are one of the areas currently under consideration as part of the OSC’s burden reduction initiative, until the project is completed, the guidance issued for primary business analysis in OSC Staff Notice 51-728 Corporate Finance Branch 2016-2017 Annual Report continues to apply. As such, the OSC continues to require that an issuer include in a long-form prospectus the three-year financial history (two years for venture issuers) of those businesses acquired by the issuer (or that will likely be acquired) if those businesses are “in the same primary business of the issuer”. The OSC’s interpretation of the financial statement requirements of Form 41-101F1 Information Required in a Prospectus has, in some cases, been broader than that taken in other jurisdictions, requiring audited historic financial statements to be in a prospectus for acquisitions that may not otherwise be considered significant. As fewer acquisition will be considered significant as a result of recent amendments to the significant acquisition tests, issuers are cautioned to carefully consider whether financial statements for non-significant acquisitions must be included in a prospectus as a result of the OSC’s primary business interpretation.
Asset vs. Business Acquisitions
Also related to IPO financial statement requirements, as well as significant acquisition determinations, issuers are reminded that the tests for determining whether an acquisition is an asset or business acquisition are different under accounting rules and securities laws. As such, issuers must make a determination under securities laws as to whether an acquisition is a business acquisition which may have a different result than under accounting policies. The OSC generally views the acquisition of licenses, patents, royalties and intellectual property as “business” acquisitions for securities law purposes, as the revenue producing activity or potential revenue producing activity remains the same.
Sufficiency of Proceeds and Financial Condition of an Issuer
When reviewing a prospectus, the OSC will consider, among other things, whether the aggregate proceeds being raised, together with the issuer’s other resources, are sufficient to accomplish the purpose of the offering as stated in the issuer’s prospectus. A prospectus should include clear disclosure with respect to use of proceeds and the issuer’s financial condition, including liquidity concerns. Additional disclosure may be requested by the OSC, including with respect to negative cash flows, working capital deficiencies, net losses and significant going concern risks. Where representations about an issuer’s ability to continue as a going concern are inconsistent with the issuer’s historical statements of cash flows, the OSC may request that a cash flow forecast or financial outlook be included to support the expected period of liquidity. However, disclosure may not be sufficient to satisfy the OSC’s concerns and a receipt may be refused. Similar considerations will be given to a base shelf prospectus and particular concern will arise where it appears that the issuer’s cash flow is insufficient to continue operations or satisfy developmental milestones for the next 12 months.
Confidential Pre-File Review of Prospectuses
As of the date of the Report, the OSC had reviewed 21 confidential pre-file prospectuses filed in accordance with CSA Staff Notice 43-310 Confidential Pre-file Review of Prospectuses (for non-investment fund issuers). Issuers are reminded to carefully consider whether the draft preliminary prospectus is at an appropriate stage for confidential pre-file. A draft may not be ready for review where the disclosure falls short of the standard required for a preliminary prospectus, there is no significant prospect of a near-term transaction, or the terms and conditions of the offering (and any related transaction) have yet to be settled.
Timing for Inclusion of Financial Statements (IPO Venture Issuer)
Annual financial statements required to be included in a long-form prospectus are for completed financial years ended more than 90 days before the date of the prospectus for non-venture issuers and 120 days before the prospectus for venture issuers. Similar requirements apply to interim financial statements (45 days and 60 days). Notably, however, “IPO venture issuers” do not benefit from the extended deadlines applicable to venture issuers (i.e., existing reporting issuers) and must comply with the standard financial statement deadlines (90 days for annual financials and 45 days for interim financials). As a reminder, an “IPO venture issuer” is an issuer that (a) files a long form prospectus, (b) is not a reporting issuer in any jurisdiction immediately before the date of the final long form prospectus, and (c) as at the date of the long form prospectus, does not have any of its securities listed or quoted, has not applied to list or quote any of its securities, and does not intend to apply to list or quote any of its securities, on the TSX, the NEO Exchange, a U.S. marketplace, or a marketplace outside of Canada and the US, other than AIM or PLUS. As set forth in the Report, an RTO acquirer, being the target in a reverse takeover transaction, will also be subject to the standard financial statement deadlines.
Issuers considering entering the cannabis industry or making new investments in the cannabis industry are reminded that announcements of these opportunities must be balanced and not potentially misleading to investors. Issuers who are substantially dependent on licenses to cultivate or sell cannabis, or on leased facilities in which those activities are performed, should file the related licenses/agreements as material contracts on SEDAR. Specific guidance for issuers operating in the cannabis industry in Canada is also included in the Report which, among other things, suggests that disclosure of investments in cannabis-related activities should be qualified, where appropriate, by specific risk factor disclosure.
Recently, there has been an influx of issuers involved in the psychedelic drug industry. Given the illegality of psychedelic drugs in various countries, the OSC has indicated that issuers engaged in activities related to psychedelic drugs should have clear disclosure regarding the regulatory, licensing and legal framework(s) under which the issuer operates. OSC Staff expect to see risks associated with the business appropriately identified, understood and managed by the issuer’s board of directors. Issuers may consider analogous disclosure to the expectations set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities. Issuers in the psychedelic industry are encouraged to consult with OSC Staff on a pre-file basis to discuss the appropriate level of disclosure and any other novel considerations that may arise.
Automatic Securities Disposition Plans
As previously discussed, in late 2019, the CSA had announced that it would review ASDPs to ensure they remain a legitimate trading mechanism by insiders and do not undermine the fairness of the Canadian capital markets. In the same announcement, the CSA indicated that it would be unlikely to recommend new insider reporting relief for trades under ASDPs. The CSA continues to consider its approach to ASDPs and remains unlikely to recommend insider reporting relief for trades under ASDPs.
Continuous Disclosure Review Program
The Report also discusses the outcomes of the OSC’s continuous disclosure review program. Where the OSC conducted a full continuous disclosure review of an issuer, in the vast majority of cases, prospective disclosure enhancements were required as opposed to immediate action. Issuers involved in an issue-oriented review were more likely to be required to take immediate action to remedy an issue identified by the OSC, particularly where deficiencies were identified among several issuers.
The Report also highlights a number of areas where issuers’ disclosure could be improved, including a number of areas specific to the impact of COVID-19. This guidance is similar to that found in CSA Multilateral Staff Notice 51-361 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019, as we have previously discussed.