The Canadian Securities Administrators (CSA) have proposed changes to the Companion Policy to National Instrument 41-101 General Prospectus Requirements (NI 41-101CP), notably intended to reduce uncertainty surrounding the requirement to include the financial statements of certain acquired businesses in an IPO prospectus. Specifically, Form 41-101F1Information Required in a Prospectus requires issuers to include in a long form prospectus the financial statements of businesses acquired in the previous three years, or that are proposed to be acquired, if a reasonable investor would regard the primary business of the issuer to be the business acquired or proposed to be acquired (the Primary Business Requirements). The Primary Business Requirements also apply with respect to securities legislation or exchange rules that require prospectus-level disclosure. Importantly, the Primary Business Requirements currently include very limited objective financial thresholds or guidance on the level of materiality of the acquisition or proposed acquisition that would trigger financial statement disclosure requirements. This has generally resulted in the need to apply for exemptive relief and inconsistent relief being granted across various jurisdictions.

According to the CSA, issuers preparing an IPO prospectus often consult with CSA staff on a pre-file basis with respect to whether an acquired business should be considered part of the primary business of the issuer and whether, as a result, financial statements are required in respect of those businesses. This frequently results in added time and costs for issuers and, as noted above, the application by CSA members of the Primary Business Requirements has, at times, been inconsistent across various jurisdictions. For example, the Ontario Securities Commission's (OSC) interpretation of the financial statement requirements in Form 41-101F1 has become broader than that taken in other jurisdictions, requiring audited financial statements to be included in a prospectus for acquisitions that may not otherwise be considered significant. This OSC interpretation had been formally expressed in OSC Staff Notice 51-728 Corporate Finance Branch 2016-2017 Annual Report, which stated that an IPO prospectus was required to include "a three-year financial history [.] of the business that investors are investing in, even if this financial history spans across multiple legal entities over the three-year period [including] the financial history for those businesses acquired or that will likely be acquired if those businesses are in the same primary business of the issuer."

As such, and in response to feedback received as part of the CSA's burden-reduction initiative, the proposed changes to NI 41-101CP would include:

  1. additional guidance on the interpretation of the Primary Business Requirements, including illustrative examples. For example, the amended NI 41-101CP would state that historical financial statements would be required not only where an acquisition exceeded the 100% significance threshold, but also where an acquisition that fell below the 100% significance threshold changed the primary business of the issuer;
  2. additional guidance in respect of predecessor entities;
  3. guidance and examples of when additional information may be required in order to meet the requirement for full, true and plain disclosure. The amended NI 41-101CP would discuss a broader range of exceptional scenarios where issuers could be required to include additional financial information; and
  4. guidance in regards to determining what constitutes a business in the context of acquired mining assets. Specifically, the acquisition of mining assets would not be considered a business requiring financial statements where the acquisition was (a) an arm's length transaction, (b) no other assets were transferred and no other liabilities were assumed, and (c) there had been no exploration, development or production activity on the mining assets in the three years (two years for an IPO venture or venture issuer) prior to the date of the preliminary prospectus.

According to the CSA, the proposed changes are expected to result in a significant decrease in pre-file applications and the time spent thereon by issuers and their advisors. Importantly, materials annexed to the proposed changes suggest that the CSA have decided not to pursue a "coverage model" whereby a certain percentage of the issuer's business, inclusive of past acquisitions, would be required to be comprised in the audited financial statements included in an IPO prospectus. The review of such coverage calculations and related analysis has often been a focal point of pre-file applications for issuers that had completed multiple acquisitions within the three most recent financial years prior to IPO.

The CSA are accepting comments on the proposed amendments until October 11, 2021.

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