Canada: Canadian Securities Administrators Offer Financial Statement Disclosure Guidelines for IPOs
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On August 12, 2021, the Canadian Securities Administrators (CSA) released draft guidance on financial statement disclosure required for acquisitions made prior to or concurrent with an IPO. If implemented, the guidelines would specify when acquisitions will be considered the “core business” of an issuer and therefore require disclosure of financial statements at the issuer level in a prospectus.
We welcome the clarification of the IPO requirements for companies that have been in operation for more than three years, but believe that changes are appropriate to provide similar treatment to entities such as REITs, roll-up issuers and other entities incorporated less than three years before their IPOs, and treat all IPO issuers consistently.
Context and proposed orientations
Historically, the Canadian financial statement requirements for IPOs have not been interpreted in the same way by the various provincial securities commissions.
In particular, the Ontario Securities Commission has taken a strict position as to when an acquisition is the “principal business” of an issuer and generally requires historical financial statements for all acquisitions made at the time or in the year. during the three-year period1 before, an IPO,
regardless of the size of the acquisition. This interpretation has placed a significant burden on issuers to obtain or prepare audited financial statements for small acquisitions or to undertake an exemption process. This can lead to increased costs, delays and uncertainty for market players.
The proposed guidelines would clarify that for all provincial regulators, an acquisition will be the “core business” of an issuer if its assets, income or investments exceed 100% of any of these measures applied. to the issuer before the acquisition. Acquisitions below the 100% threshold would be subject to business acquisition requirements, which are less onerous than “core business” financial statements.
Unlike business acquisition requirements, which are only triggered if at least two of the three metrics are exceeded, the test for a “primary activity” is triggered if any of the three metrics are exceeded.
In addition, the proposed guidelines do not systematically apply the clarified requirements to entities such as REITs, roll-up issuers and other entities incorporated less than three years before their IPO. Currently, an issuer that has not existed for three years1 must include audited financial statements in its IPO prospectus for each entity considered to be a predecessor of its business whatever the importance. Although the guidelines provide for an exemption process when the financial statements of the predecessor entity are not available or are immaterial, this can lead to increased costs, delays and uncertainty for participants in the predecessor. Marlet.
Accordingly, Goodmans is submitting a submission to the CSA recommending additional changes to the disclosure requirements in order to treat IPOs consistently and further reduce the regulatory burden on issuers.
In particular, we propose that:
- that the materiality test for “principal enterprises” be harmonized with the two-part materiality test provided for by the rules on business acquisition so that additional information on the financial statements is not unnecessarily required.
- a materiality threshold or a coverage ratio is introduced for REITs or other roll-up issuers that have not existed for three years1 to address the inconsistency between the treatment of different types of IPO entities.
If you would like to discuss the proposed directions or our submission, please contact a member of our Corporate Finance and Securities group.
The authors would like to thank Matthew Erdman, articling student, for his assistance in drafting this update.
1. A two-year period for venture issuers.
The content of this article does not constitute legal advice and should not be relied on in this manner. Specific advice should be sought regarding your particular situation.
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