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 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
The Notice states that the CSA will continue to monitor this
issue and consider what further guidance or policy changes may be
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
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 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
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.
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