The Canadian Securities Administrators (CSA) has released a notice and request for comment (Notice) proposing clarifications to primary business financial disclosure expectations. The purpose is to harmonize, across CSA jurisdictions, the interpretation of the financial statement requirements in respect of an issuer's "primary business" in a long form prospectus and highlight the requisite disclosure of historical financial information for an acquired business within the context of an initial public offering (IPO).
CONTEXT
The Notice has been published in furtherance of the CSA's burden reduction project (see our May 2017 Blakes Bulletin: Canadian Securities Administrators Seek to Reduce Regulatory Burdens for Reporting Issuers and our April 2018 Blakes Bulletin: CSA Announce Policy Projects to Reduce Regulatory Burden for Public Companies), as well as the OSC's separate, but complementary, burden-reduction project (see our November 2019 Blakes Bulletin: Burden Reduction: OSC Addresses 199 Problems).
BACKGROUND
Long form prospectuses (including for IPOs) are required to
include certain financial statements of the issuer and for any
business or businesses acquired, or proposed to be acquired, if a
reasonable investor reading the prospectus would regard the primary
business of the issuer to be the business or businesses acquired,
or proposed to be acquired (collectively, the Primary Business
Requirements).
The purpose of the Primary Business Requirements has been to
provide investors with three years (non-venture issuer) or two
years (IPO venture issuer) of annual financial statements (plus any
applicable interims) of the business an investor is investing in,
even if this financial history spanned multiple legal entities over
the relevant time period.
For example, if a non-venture issuer (Issuer A) was formed in 2015,
has a December 31 year-end and was filing a long form prospectus
for its IPO in April 2021, the prospectus would be required to
include annual financial statements of Issuer A for the years ended
December 31, 2018, 2019 and 2020. In addition, if Issuer A acquired
a business from Vendor B in September 2019, which a reasonable
investor reading the prospectus would regard as comprising part of
the primary business of Issuer A, then financial statements must
also be included in the prospectus for the period of Vendor B's
ownership of the business from January 1, 2018, until the date of
acquisition by Issuer A in September 2019.
Published commentary from the Ontario Securities Commission (OSC)
has provided that there is generally no significance test for
determining the requisite disclosure for such acquisitions. The
only exception is if the business is over 100 per cent when
compared to the primary business of the issuer. In this case, it is
important for investors to have the financial history of this
business even though it is not the same as that of the primary
business of the issuer.
Accordingly, even if the business was acquired from Vendor B on
January 2, 2018, and represented only one per cent of the assets or
pre-tax net income of Issuer A, Issuer A would still be required to
include financial statements in the prospectus for the period of
Vendor B's ownership of the business (i.e., one day). However,
Issuer A could seek exemptive relief on a discretionary basis from
the applicable CSA member through a formal application
process.
In practice, when a prospective non-venture IPO issuer has made
acquisitions in the three financial years preceding the IPO
prospectus filing, the issuer and its advisors will often consult
with CSA staff to ascertain what historical financial statements
must be included in the prospectus and confirm whether one or more
of the acquired businesses comprised part of the primary business
of the issuer. However, the CSA acknowledges that sometimes such
discussions result in inconsistent interpretations that add time,
cost and uncertainty for issuers.
The proposed changes in the Notice aim to reduce the regulatory
burden resulting from uncertainty about the interpretation of the
Primary Business Requirements, without compromising investor
protection.
PROPOSED NEW GUIDANCE
While the rules in National Instrument 41-101 and the form
requirements in Form 41-101F1 will remain the same, the CSA is
proposing to replace the existing regulatory commentary on the
Primary Business Requirements by amending Companion Policy
41-101CP.
A key aspect of this new guidance is providing clarity as to when
the Primary Business Requirements require the inclusion of
financial statements in long form prospectuses for acquisitions by
making reference to the existing significance tests that trigger
business acquisition report filing requirements under Canadian
securities laws (BAR Requirements) (see our August 2020 Blakes Bulletin: The BAR Will Be Raised: CSA
Increases Business Acquisition Report Triggers and
Thresholds).
In particular, the Notice provides the following examples of when a
reasonable investor would regard the acquired business to be the
primary business of the issuer, thereby triggering the Primary
Business Requirements:
- An acquisition that exceeds the 100 per cent significance threshold calculated under the BAR Requirements (failing which, the BAR Requirements must be followed, where applicable)
- An acquisition that is less than the 100 per cent significance threshold calculated under the BAR Requirements but still changes the primary business of the issuer, as disclosed in the prospectus
- A reverse take-over
- A qualifying transaction for a capital pool company under the policies of the TSX Venture Exchange, or
- A qualifying acquisition or qualification transaction by a special purpose acquisition corporation under the policies of a recognized exchange
Despite this guidance, issuers still need to consider the facts
of each situation, including the facts of the business acquired or
proposed to be acquired, and determine whether a reasonable
investor would regard the primary business of the issuer to be the
acquired business or related businesses.
The CSA also reminds issuers that for securities legislation
purposes, an acquisition may constitute an acquisition of a
business even if the acquired set of activities or assets does not
meet the definition of a "business" for accounting
purposes.
In addition, the disclosure in the prospectus, including financial
statements and applicable management discussions and analyses, must
satisfy the requirement that the long form prospectus contains
full, true and plain disclosure of all material facts relating to
the securities being distributed.
The CSA has indicated that the types of additional financial
information that might be necessary will vary on a case-by-case
basis. These include property or business valuation reports,
forecasted cash flow information and additional disclosure about an
acquired business, such as key financial information. Helpfully,
the Notice includes several detailed examples for
consideration.
In addition to long form prospectuses, the CSA's guidance in
the Notice also applies to other instances where the Primary
Business Requirements are relevant. An example of this would be
where securities legislation and/or exchange requirements require
prospectus-level disclosure prepared in accordance with the long
form prospectus form requirements (e.g., in an information circular
relating to certain restructuring transactions).
Other Proposed Updates
Further to the Notice, the CSA are also proposing amendments to Companion Policy 41-101CP to give guidance on the following:
- When an issuer can use an optional test under the BAR Requirements to calculate the significance of an acquisition for purposes of assessing whether the acquisition is a primary business
- When and for what time periods financial statements would be required in certain circumstances
- When the CSA may require additional information to meet the requirement for full, true and plain disclosure of all material facts and the nature of that information
- When the CSA would not consider an acquisition of mining assets to be a business
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