On March 25, 2021, the Canadian Securities Administrators (CSA) published Staff Notice 41-307 (Revised) Concerns regarding an issuer’s financial condition and the sufficiency of proceeds from a prospectus offering (Notice). The Notice alerts alert issuers (other than investment fund issuers) and their advisors about the CSA approach where there are concerns regarding the financial condition of an issuer and/or the sufficiency of proceeds in the context of a prospectus offering.
According to the Notice, these concerns will affect the ability of securities commissions to recommend that a receipt be issued for a prospectus. This Notice applies to all prospectus reviews, regardless of whether the offering is an IPO new issue or secondary offering.
The Notice describes issues that have arisen in past prospectus reviews and explains the types of comments raised about an issuer’s financial condition and/or the sufficiency of proceeds.
As well, the Notice indicates that securities commissions may refuse to issue a receipt for a prospectus on the basis that it is not in the public interest where proceeds from the prospectus offering, along with the issuer’s other resources, will be insufficient to accomplish the purpose of the issue stated in the prospectus (the sufficiency of proceeds receipt refusal provision).
The Notice states that a prospectus must contain clear disclosure on how an issuer intends to use the proceeds raised in the offering as well as disclosure of the issuer’s financial condition, including any liquidity concerns. In some circumstances, this type of disclosure, on its own, may not be sufficient to satisfy receipt refusal concerns such as where an issuer lacks sufficient funds to continue operations, or if the proceeds from the prospectus offering will be insufficient to accomplish the purpose of the offering.
According to the Notice when conducting prospectus reviews, anticipated proceeds from a prospectus offering to be insufficient if they 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.
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.