Canada: CSA Outlines Concerns Regarding An Issuer’s Financial Condition In The Context Of A Prospectus Offering


  • In limited circumstances, where there are concerns with the financial condition of an issuer and/or the sufficiency of proceeds, a receipt for a prospectus will not be issued
  • Five key areas of concern in respect of which comments may be raised during the prospectus review process: (i) missing information regarding offering amount and pricing, (ii) offering structure, (iii) use of proceeds disclosure, (iv) risk factor disclosure, and (v) representations to support ability to continue operations
  • Guidance applies to all issuers (other than investment fund issuers) and applies to all prospectus reviews (e.g., IPOs, new issues or secondary offerings)

The Canadian Securities Administrators (the CSA) have published Staff Notice 41-307 (the Notice) setting out their approach where there are concerns regarding an issuer's financial condition and/or the sufficiency of proceeds in the context of a prospectus offering. The CSA have indicated that in limited circumstances, where there are significant investor protection concerns, a receipt for a prospectus will not be issued. The guidance applies to all issuers (other than investment fund issuers) and applies to all prospectus reviews (e.g., IPOs, new issues or secondary offerings).


Securities legislation prohibits a decision maker from issuing a receipt for a prospectus in a variety of specified circumstances, including where it appears that the proceeds from the offering, together with the issuer's other resources, will be insufficient to accomplish the purpose of the issue set out in the prospectus. Consideration of an issuer's financial condition is therefore an essential part of the prospectus review process and a prospectus is required to contain adequate disclosure regarding the use of proceeds from the proposed offering, as well as the issuer's financial condition (including any liquidity concerns).

It is the view of the CSA that, notwithstanding adequate disclosure, in certain circumstances a receipt will not be issued for a prospectus. For example, a receipt may be refused where an issuer lacks sufficient funds to continue operations or if the anticipated proceeds from the prospectus offering will be insufficient to accomplish the purpose of the offering. The anticipated proceeds from a prospectus offering may be considered to be insufficient by the CSA if the funds are raised:

  • for a specific purpose but do not address the issuer's short-term liquidity requirements;
  • through a best efforts offering without a minimum subscription, or a minimum subscription that does not appear to be sufficient to satisfy the issuer's short-term liquidity requirements; or
  • through a shelf prospectus offering that can be drawn down in small increments that, when considered separately, may not be sufficient to satisfy the issuer's short-term liquidity requirements.

The CSA state that the question of whether an issuer has sufficient resources to meet its short-term liquidity requirements will vary depending on the circumstances of each issuer.


The Notice addresses five key areas of concern relating to an issuer's financial condition and/or sufficiency of proceeds in respect of which comments may be raised during the prospectus review process. The list of items is not intended to be exhaustive.

Missing information regarding offering amount and pricing

If information regarding the size of the offering and pricing information is bulleted at the time of filing of a preliminary prospectus, the CSA will require a reasonable opportunity to review a blackline of the draft form of final prospectus. In order to avoid unanticipated delays, the CSA suggest that issuers file the blackline (which may include estimates or ranges for the bulleted information) not less than two business days prior to filing final materials. In addition, the CSA may also request to review any green sheets or other similar marketing materials used in connection with an offering.

Offering Structure

The CSA will review the overall structure of the proposed offering in the context of the issuer's financial condition. The Notice sets out examples of comments that may be raised by the CSA based on the structure of an offering.

Best efforts agency offering. In the context of a best efforts agency offering, the CSA will want to know if there is a minimum subscription. If not, the CSA may ask for an explanation as to how the stated purpose of the offering and the use of proceeds will be achieved absent a minimum subscription. Further, the CSA may require disclosure regarding (i) how the proceeds will be used, with reference to various potential thresholds of proceeds raised and, (ii) the potential impact on the issuer's liquidity, operations, capital resources and solvency.

Base shelf prospectus offering. The CSA may determine that a base shelf prospectus is not appropriate given the issuer's financial condition and uncertainty of financing. The CSA may request submissions regarding, among other things, the issuer's rationale for filing a base shelf prospectus and the proposed nature and timing of the offerings under the base shelf prospectus. In order to address the concern that incremental drawdowns may be insufficient to satisfy an issuer's short-term liquidity requirements, the CSA state that they may make certain requests of an issuer, including asking it to (i) file a short form prospectus with a minimum subscription, (ii) file a short form prospectus with a fully underwritten commitment and/or, (iii) arrange for additional sources of financing.

Rights offering. The CSA may raise comments regarding alternatives to a minimum subscription, such as a stand-by commitment.

Use of Proceeds Disclosure

The Notice highlights three main areas where inadequate use of proceeds disclosure has been noted by the CSA:

Principal purposes of proceeds. The CSA may request that an issuer provide a breakdown of the proceeds (i) towards a certain phase of a project (in the case of an exploration or development stage issuer), (ii) towards capital expenditures, and (iii) allocated to general and administrative expenditures. If the offering is a minimum subscription, disclosure must be provided in respect of the use of proceeds for both the minimum and maximum subscription and, in certain circumstances, disclosure should be provided regarding adjustments in spending if the proceeds raised are less than the maximum amount. The CSA also reminds issuers that statements such as "for general corporate purposes" are not considered to be sufficient disclosure.

Business objectives and milestones. Proceeds from an offering must be sufficient to meet an issuer's working capital and operational needs until its next significant milestone. The CSA may request additional disclosure where an issuer has not sufficiently described each significant event that must occur for the business objectives to be accomplished.

Negative cash flow from operating activities. Where an issuer has reported negative cash flow from operating activities in the most recent financial year for which financial statements have been included in the prospectus, it should (i) disclose that fact prominently in the prospectus, (ii) disclose whether (and if so, to what extent) the proceeds will be used to fund any anticipated negative cash flow in future periods and, (iii) disclose negative cash flow as a risk factor. The CSA may also request additional disclosure in the prospectus regarding the issuer's most current working capital amount, the issuer's cash burn rate, the period of time that the proceeds are expected to fund operations and any significant debt obligations maturing in the short term.

Risk Factor Disclosure

The Notice reminds issuers that risk factors need to be disclosed in order of seriousness, from the most to the least serious, and cautions issuers against using insufficient or boilerplate disclosure. An issuer with a going concern risk must clearly disclose such risk and should explain the uncertainties that may create going concern risk and how the issuer is addressing that risk.

Issuers must also disclose negative cash flow from operating activities as a risk factor and, where an offering is being conducted on a best efforts agency basis with no minimum subscription, issuers should include on the face page of the prospectus a statement that there is no minimum amount of funds that must be raised under the offering and that an investor will not generally be entitled to a return of its investment if only a small portion of the disclosed offering amount is raised.

Representations to Support Ability to Continue Operations

As noted above, it is the view of the CSA that an issuer contemplating an offering should be able to continue its operations for a reasonable period of time and meet its short-term liquidity requirements and the CSA may ask issuers to provide a written representation of the number of months that it will be able to continue its operations given its financial condition. Generally, issuers will be requested to include this representation in the prospectus on the basis that this information is a material fact in the particular circumstances of the issuer due to concerns over its financial condition.

In certain instances – where, for example, an issuer's representations about its ability to continue as a going concern and the period during which it expects to be able to continue operations is inconsistent with the issuer's historical statement of cash flows or the disclosure in the preliminary prospectus or otherwise appears to be unreasonable – the CSA may request that the issuer provide a forecast projecting the issuer's cash flow from operating activities for the period of time the issuer has represented that it can continue operations. In these limited circumstances where an issuer is asked to provide a forecast, the CSA may also request that the forecast – together with all significant assumptions and the material risk factors that could cause actual results to differ materially from the forecast – or significant portions thereof be included in the prospectus.

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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