Canada: CSA Issues Staff Notice 41-307 On The Concerns Regarding An Issuer’s Financial Condition And The Sufficiency Of Proceeds From A Prospectus Offering

Last Updated: October 9 2012
Article by Amanda Robinson and Samuel Li

The Canadian Securities Administrators (CSA) released Staff Notice 41-307 (Notice) in March 2012, which discusses the CSA's approach to the review of a prospectus related to any offering, including an IPO, new issue or secondary offering, when there are concerns with the financial condition of an issuer or the sufficiency of the proceeds of such offering. According to the Notice, this guidance is not intended to inhibit capital raising through prospectus offerings, other than in instances of significant investor protection concerns.

Receipt Refusal

Pursuant to securities legislation, the regulator must issue a receipt for a prospectus unless it is determined that it is not in the public interest to do so or for certain other reasons enumerated in securities legislation. The Notice states that, pursuant to securities legislation, a receipt for a prospectus will not be issued in certain circumstances related to an issuer's financial condition, including if it appears that the proceeds from the offering relating to the prospectus, together with the issuer's other resources, will be insufficient to complete the stated purpose for the proceeds as set out in the prospectus or when an issuer lacks the required funds to continue operations.

Areas of Focus

The Notice sets out focal points in prospectus disclosure where comments from the regulator may arise, noting that this list is not exhaustive and each prospectus will be reviewed on its own merits:

  1. Missing information regarding offering amount and pricing
  2. Offering structure
  3. Use of proceeds disclosure
  4. Risk factor disclosure
  5. Representations to support ability to continue operations

Missing Information

If a preliminary prospectus is filed with bulleted offering amounts, pricing information and use of proceeds, the Notice states that a comment will be issued requiring the issuer to provide the regulator with a reasonable opportunity to review the draft blackline final prospectus that includes the bulleted information. Such draft blackline final prospectus should be filed no less than two business days prior to filing the final materials. If providing complete information is not practicable, estimates or ranges may be accepted. Copies of green sheets or similar marketing materials may also be requested. This information is required to assess the sufficiency of the proceeds for the stated purpose and whether it is in the public interest to issue a receipt.

Offering Structure

The Notice indicates that the overall structure of the proposed offering will be reviewed with respect to the issuer's ongoing financial condition. In particular, where there is no minimum subscription for an offering, even if a minimum subscription is not required for an offering, and there are concerns over the issuer's financial condition or where a minimum amount of proceeds appears necessary to meet the stated purpose, the following comments may be issued and the issuer may need to change the structure of the offering.

Best Efforts Agency Offering

As stated earlier, if there is no minimum subscription, questions may arise regarding how the stated purposes of the offering will be met and the proceeds used absent a minimum subscription. Quantitative and qualitative discussion may be required regarding the use of proceeds, with reference to thresholds of proceeds raised and the impact on the issuer's liquidity, operations, capital resources and solvency.

Base Shelf Prospectus Offering

A base shelf prospectus may be considered inappropriate where there are concerns about an issuer's financial condition or uncertainty related to financing. Further submissions may be required on the following:

  • rationale for filing a base shelf prospectus, whether a prospectus supplement is intended to be filed in the near future and, if so, the details of the offering, including how the proceeds are to be used;
  • availability of other sources of financing if sufficient financing cannot be raised;
  • proposed nature, timing and details of offerings under the base shelf prospectus, including use of a minimum subscription amount and specific use of proceeds for offerings contemplated over the next 12 months; and
  • details of anticipated development milestones, including expected timing and financing requirements.

Additionally, due to concerns that incremental draw-downs under the base shelf prospectus will not be enough with respect to short term liquidity requirements, it may be required that the issuer file a short form prospectus with a minimum subscription, a fully underwritten commitment and/or arrange for additional sources of financing.

Rights Offering

Where there is a concern that the proceeds will not be sufficient to meet stated objectives or about the issuer's financial condition, the CSA may comment with respect to alternatives to a minimum subscription, such as obtaining a standby commitment.

Use of Proceeds Disclosure

The Notice provides guidance on what is considered adequate use of proceeds disclosure under Form 41-101F1 Information Required in a Prospectus (NI 41-101) and Form 44-101F1 Short Form Prospectus (NI 44-101).

Principal Purposes of the Proceeds

If the use of proceeds disclosure is too general, additional disclosure will be requested from the issuer, such as a breakdown of the proceeds towards phases of an exploration or development stage project, capital expenditures and general and administrative expenditures and disclosure of how proceeds from recent financings have been allocated. Issuers are reminded that a statement attributing a portion of proceeds to "general corporate purposes" is insufficient disclosure, as is frequently noted in comment letters issued by the regulators. 

Business Objectives and Milestones

Additional disclosure will be required regarding each significant event that must occur for the business objectives to be accomplished, including timing and costs. Proceeds of an offering must be sufficient to meet working capital and operational needs until the next significant milestone can be met. For mining issuers, the use of proceeds disclosure should be consistent with the technical report and disclosure in the prospectus must break down the exploration and/development activities and the anticipated timing for each phase. 

Negative Cash Flow from Operating Activities

Where the issuer has negative cash flow from operating activities in its most recently completed financial year for which financial statements are included in the prospectus, the issuer should disclose such negative cash flow, including as a risk factor, and whether and to what extent proceeds from the offering will be used to fund anticipated negative cash flow in the future. Additional information may be required to be included in the prospectus regarding current working capital amount, cash burn rate, the period the proceeds of the offering are expected to fund operations and any significant debt obligations maturing in the short term.

Taking the circumstances into consideration, negative cash flow from operating activities may constitute a material fact for issuers that are not technically junior issuers. In such a situation, the issuer must disclose this information in order to provide "full, true and plain disclosure of all material facts" as required.

Risk Factor Disclosure

Issuers are reminded that boilerplate statements for key risk factors are not sufficient disclosure and that risk factors must be disclosed in order of seriousness, from the most serious to the least. 

Issuer's Financial Condition

In order to allow readers to make an informed investment decision, a prospectus should clearly disclose the issuer's going concern risk, addressing the uncertainties that contribute to going concern risk and how the issuer will address the risk. Adequate disclosure should include quantification of losses, working capital deficiencies, negative cash flow from operations and debt levels; consideration of liquidity or solvency issues; how such issues will be remedied; other sources of financing available; the impact of liquidity issues on operations; the issuer's ability to remain a going concern; and the period of time that the proceeds are expected to fund operations. 

Junior issuers with going concern risk should include the disclosure required by item 8.7 of NI 41-101F1, including disclosure of the period of time the proceeds are expected to fund operations; an estimate of total operating costs required to achieve stated business objectives during that period; and the estimated amount of other material capital expenditures during that period. Where this information constitutes a material fact for non-junior issuers, disclosure under item 8.7 of NI 41-101F1 may be required by the regulators. 

The CSA notes that even where there is adequate disclosure of the risks, the regulator may refuse to issue a receipt if it would be against the public interest to do so.

Risk Associated with Negative Cash Flow from Operating Activities

Issuers are reminded that, pursuant to Companion Policies 41-101CP and 44-101CP, issuers should disclose negative cash flow from operating activities as a risk factor. 

Risk Associated with No Minimum Subscription

If the offering is conducted on a best efforts agency basis, even where the regulator has accepted there is no requirement for a minimum subscription, the issuer must disclose on the face page of the prospectus that there is no minimum amount of funds that must be raised by the offering and that investors are not generally entitled to a return of their investment, even if only a small amount is raised.

Representations to Support Ability to Continue Operations

The CSA takes the view that an issuer contemplating an offering should be able to continue its operations for a reasonable period of time following the offering and must meet short term liquidity requirements. The period of time that is reasonable is determined in the context of the issuer's industry group. Issuers should anticipate comments on these matters if there is a going concern risk.

Representation Regarding Ability to Continue Operations

The issuer may be asked to provide a written representation to the regulator with respect to the number of months it expects to be able to continue its operations given its financial condition, with such representation to be disclosed in the prospectus. The proceeds from the offering can only be considered in the representation where the offering is a bought deal, or if there is a minimum subscription or a stand-by commitment. The CSA may take the view that the absence of this information may be considered an omission of a material fact or may raise a public interest concern.

Support for Representations Regarding Ability to Continue Operations

It is the issuer's responsibility to make the determination as to how many months it expects to be able to continue its operations. Where such representations are inconsistent with the issuer's historical statement of cash flows, with the disclosure in the preliminary prospectus, or otherwise appear unreasonable, the issuer may be requested to provide a cash flow forecast to support determination. 

The cash flow forecast should be prepared in accordance with International Financial Reporting Standards and should project the issuer's cash flow from operating activities for the period of time the issuer has determined it can continue operations, supported by a list of assumptions used to make the forecast. The regulator will assess the forecast to determine whether the assumptions are consistent with disclosure in the prospectus and with the issuer's historical financial performance.

The regulator may also request that the issuer disclose the entirety or significant portions of the forecast and all significant assumptions in the prospectus. This information may represent a material fact related to the issuer required to inform investors' decisions. Any such disclosure required will be subject to the prospectus liability provisions.

Forward Looking Information and Future Oriented Financial Information

The issuer's representation about its ability to continue operations will constitute forward-looking information (FLI), defined generally to mean disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action, and may also constitute future oriented financial information (FOFI), depending on its content. Such disclosure must comply with the FLI and FOFI requirements in NI 51-102 Continuous Disclosure Obligations (NI 51-102). Cash flow forecasts and related factors and assumptions may also be subject to these requirements.  Issuers must also update previously disclosed Management's Discussion & Analysis to comply with section 5.8 of NI 51-102.


Issuers must include sufficient disclosure in a preliminary prospectus with respect to their financial condition, particularly with respect to the use and sufficiency of proceeds from an offering. Where such disclosure is insufficient, the issuer should expect to receive comments in respect of their financial condition and sufficiency of proceeds from a prospectus offering. The regulator may require additional disclosure, depending on the issuer's financial circumstances, especially where there is no minimum subscription or a going concern risk. While issuers will be required to make sufficient disclosure of financial risks and use of proceeds, they should be aware that, in certain cases, where such disclosure raises significant investor protection concerns, the regulator may recommend that a receipt for the prospectus not be issued.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions