The Canadian Securities Administrators (CSA) recently released Staff Notice 41-305 Share Structure Issues – Initial Public Offerings (Notice) which discusses the factors that will be considered by regulators when assessing an issuer's share structure in the context of an initial public offering (IPO).
According to the Notice, the CSA have encountered a number of IPOs by issuers with share structures that lead them to question whether those share structures are contrary to the public interest and this has resulted generally in a recommendation that the decision-maker refuse to issue a receipt for the prospectus.
The Notice states that the regulators consider many qualitative and quantitative factors when evaluating the acceptability of IPO share structures, including:
- How the IPO price compares to the average share price paid by founders; the CSA may object where the IPO price significantly exceeds the average price paid by founders.
- The proportion of capital proposed to be contributed by the IPO purchasers in comparison to the percentage of ownership the IPO purchasers will receive in return; the CSA may object when the IPO purchasers are being invited to contribute an amount of capital that will be significantly disproportionate to their equity interest on completion of the offering.
- The average capital contributed per share for all issued and outstanding shares on completion of the offering as compared to the purchase price per share of the IPO; the CSA may be concerned if a large block of founders' shares issued for nominal amounts reduces the average capital contributed per share significantly in comparison to the IPO price.
- The amount of time, effort or resources spent developing a business; where founders have spent time, effort or resources developing a business, then a structure containing significant founders' shares may be appropriate and the CSA would not normally object to these structures when they represent a realization of business development efforts or otherwise demonstrate value.
- The distribution of the founders' shares will be considered; where some of the founders have received their shares at a significantly lower average price than other founders, the CSA may take issue with only some of the founders' shares.
- The amount of cash contributed and the time invested; generally the greater the amount of cash the founders have invested and the longer it has been actively used as part of the issuer's capital structure and development of its business, the more likely a given structure will be acceptable to the CSA.
- The number of convertible securities outstanding at exercise prices lower than the IPO price; the CSA may object to an otherwise acceptable share structure if the number of convertible securities is large enough or the exercise price is low enough.
While the Notice provides some insight into the factors that the regulators consider when evaluating proposed share structures, it does not provide certainty for every possible scenario or allow the reader to determine definitively if a given structure will be acceptable or not.