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On April 14, 2022, the Canadian Securities Administrators (CSA) published amendments to the Complementary Policy to National Instrument 41-101 General Prospectus Requirements that harmonize the interpretation of disclosure requirements in financial statements for acquisitions made before or as part of an IPO.
IPO prospectuses must include three years1 audited financial statements and MD&A of the issuer and for any acquired business if a reasonable investor reading the prospectus would consider the issuer’s “principal business” to be the acquiree. Historically, these requirements have been interpreted inconsistently by different provincial securities commissions, with some regulators taking a stricter view than others of when an acquisition constitutes an issuer’s “core business”. Through the Amendments, the CSA have reached consensus on a harmonized approach to interpreting the “core business” requirements.
The changes were originally posted for comment in August 2021. Goodmans and six other organizations submitted comment letters (see our August 23, 2021 update, Canadian securities regulators propose financial statement disclosure guidelines for IPOs).
While we welcome the clarification of IPO requirements for companies that have been in business for more than three years, we continue to believe that amendments are appropriate to accord similar treatment to entities such as REITs, roll issuers -up and other entities incorporated less than three years before their IPO. , and treat all IPO issuers consistently. We hope that such treatment will be granted through an exemption granted by securities regulators.
The amendments provide that an acquisition will be an issuer’s “core business” (and therefore require three years of audited annual financial statements and MD&A) if any of the following: (a) the share of the issuer in the consolidated assets of the acquired company exceeds 100% of the consolidated assets of the issuer; b) the issuer’s share in the consolidated investments and advances to the acquired company exceeds 100% of the issuer’s consolidated assets; or (c) the issuer’s share of the acquiree’s consolidated specified profit or loss exceeds 100% of the issuer’s consolidated specified profit or loss, in each case calculated at the end of the period. most recent fiscal year prior to acquisition2.
Acquisitions that fall below the 100% thresholds noted above will be subject to the “business acquisition” requirements, which use 30% thresholds for non-venture issuers and only require financial statement disclosure if two or more of the specified assets, investments or earnings or loss tests are triggered.
The amended guidance does not include changes to the “predecessor entity” requirements, which means that REITs and other summary issuers formed for less than three years1 prior to IPO will continue to require historical financial information for each predecessor entity whatever the importance. Where historical financial statements are not available for a “predecessor entity” or one or more of the acquired businesses is not material, an issuer may seek an exemption through a pre-filing process.
The amended guidance does not apply to reverse takeovers, qualifying transactions for SPACs and CPCs, or acquisitions that fundamentally change an issuer’s business.
If you would like to discuss these changes, please contact one of our Corporate Securities group members.
1. Two years for venture issuers.
2. Subject to certain requirements and circumstances (including the availability of separate financial statements for the acquisition), an issuer may apply an optional test, which provides that an acquisition will only be the “principal business” of an issuer only if any of the assets, investment or result tests specified are triggered from the last interim period or accounting year included in the prospectus. This optional test allows issuers to recognize growth between the date of acquisition and its last financial year or interim period, as well as the corresponding decrease in the size of the acquisition relative to the issuer.
The authors would like to thank law student Matt Erdman for his assistance in writing this update.
The content of this article does not constitute legal advice and should not be relied upon as such. Specific advice should be sought on your particular situation.
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