Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, September 2010
On September 24, 2010, the Canadian Securities Administrators (the CSA) published Staff Notice 41-305 Share Structure Issues – Initial Public Offerings (the Notice) with a stated view to providing insight into the factors considered by the regulators when assessing a proposed share structure in an initial public offering (IPO).
The Notice indicates that the CSA have encountered a number of IPOs by issuers with share structures that led the CSA to question whether those structures are contrary to the public interest. This has resulted in a recommendation against the issuance of a receipt for the prospectus on such offerings.
The Factors
The Notice states that the regulators consider many qualitative and quantitative factors when evaluating the acceptability of IPO share structures and that the Notice is intended to provide some insight into the factors that the regulators consider when evaluating proposed share structures and is not meant to provide certainty for every possible scenario and allow the reader to definitively determine if a given structure is acceptable or not.
The Notice states that the CSA will continue to monitor this issue and consider what further guidance or policy changes may be appropriate.
Set out below are the factors discussed in the Notice:
- The CSA will consider how the IPO price compares to the average share price paid by the founders and may object where the IPO price "significantly exceeds" the average price paid by the founders. The CSA have concerns where the founders have paid a nominal amount for a large block of shares compared to the IPO price. The Notice makes particular mention of companies that have already issued an "unusually large" number of shares for nominal cash consideration, especially where the company has a limited history of operations and the IPO financing is relatively small.
- The CSA will assess 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 and may object where 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 CSA will consider the average capital contributed per share for all issued and outstanding shares on completion of the offering and compare it to the purchase price per share of the IPO and 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.
- In instances where the structure contains significant founders' shares, the CSA will evaluate the amount of time, effort or resources spent by the founders in developing a business, and would not normally object to these structures when they represent a realization of business development efforts or otherwise demonstrate value.
- Where some of the founders may have received their shares at a significantly lower average price than other founders, the CSA's concern may normally focus on founders' shares that have received the larger discounts.
- The CSA will more likely find a structure to be acceptable where larger amounts of cash have been invested by the founders and where such amounts been actively used as part of the issuer's capital structure and development of its business.
- The CSA may include in its analysis significant convertible securities that are outstanding at exercise prices lower than the IPO price and may object to an otherwise acceptable share structure where "the number is large enough or the exercise price is low enough".
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.