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CSA guidance relating to the inclusion of financial statements in a prospectus



Canada Publication August 23, 2021

Financial statements in a long-form prospectus must include the financial statements of the issuer plus any business or businesses acquired by the issuer within the past three years (two years for venture issuers) or proposed to be acquired, if a reasonable investor would regard the issuer’s primary business to be the business or businesses acquired or proposed to be acquired.

The purpose of the requirement is to ensure investors have a complete financial history of the issuer.

On August 12, the CSA published, for a comment period expiring on October 11, 2021, Proposed Changes to Companion Policy 41-101CP to National Instrument 41-101 General Prospectus Requirements (CP 41-101). The purpose of these changes is to provide guidance, in relation to an acquired business, as to the specific statements that must be included in a long-form prospectus.

These proposed changes are also intended to discourage discussions with CSA staff, which may result in inconsistent interpretations. Issuers who still have questions about which financial statements should be included in a prospectus, what additional information may be required in a prospectus in order to meet the requirement for full, true and plain disclosure, or which entities should be considered as forming the basis of the issuer’s business are advised, instead, to use the pre-filing procedures set out in National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions.

The key proposed changes are summarized below.  

Primary business

Examples of when a reasonable investor would conclude that an acquired business is the primary business of the issuer are when the acquisition was:

  • a reverse takeover;
  • a qualifying transaction for a CPC; or
  • an acquisition that exceeds the 100% significance threshold calculated under subsection 35.1(4) of Form 41-101F1 – General Prospectus Requirements.

The proposed changes to CP 41-101 add the following two examples: 

  • a qualifying acquisition or qualification transaction by a SPAC; and
  • an acquisition that is less than the 100% significance threshold but still changes the primary business of the issuer, as disclosed in the prospectus.

Two specific, fact-based examples have been included to help issuers determine the circumstances where:

  • an issuer may rely upon the “Optional Significance Tests” when determining whether the 100% significance threshold has been met:
    • this first example contemplates a situation where the issuer has experienced sufficient enough growth since the acquisition in question that the acquisition no longer exceeds the 100% threshold and, as a result, a reasonable investor would not regard the acquisition to be the primary business of the issuer; and
  • an acquisition that is less than the 100% significance threshold still changes the primary business of the issuer, as disclosed in the prospectus:
    • this example contemplates an issuer that had initially been set up as a mining exploration and development company and subsequently stated its intention to become a cannabis cultivation business after making a cannabis cultivation acquisition. Since that publicly stated intention would be incorporated, in some form, in a prospectus, a reasonable investor reading the prospectus would regard the primary business of the issuer to be the cannabis cultivation business.
  • Finally, the proposed changes clarify that an acquisition may constitute the acquisition of a business for securities legislation purposes, even if the acquired set of activities or assets does not meet the definition of a "business" for accounting purposes.

Predecessor entity

Guidance to help determine whether predecessor entities form or will form the basis of the issuer’s business has been added. The example used to illustrate this guidance is an issuer incorporated as a REIT that acquired four rental properties immediately prior to or concurrently with the closing of its IPO. The guidance concludes that financial statements for each of the rental properties are required.

Additional information to be included in the prospectus

In the case of an issuer that has incurred significant growth through a series of pre-IPO acquisitions such that it has an insufficient financial history of the primary business, the proposed changes include guidance as to what additional information should be included in the prospectus, such as property or business valuation reports and forecasted cash flow information.

The obligation to provide business acquisition report level disclosure for a non-reporting issuer

The rules around significant acquisitions and business acquisitions as applicable to non-reporting issuers are confirmed as being substantively the same as those applicable to reporting issuers. The proposed changes refer issuers to the existing “decision tree” set out in Chart 2, Appendix A to CP 41-101 as a source of guidance.

Determining what constitutes a business or requires a business acquisition report – mining assets

The proposed changes will clarify that an acquisition of mining assets will not be considered to be a business requiring financial statements if all of the following apply:

  • the acquisition of the mining assets was an arm’s length transaction;
  • no other assets were transferred and no other liabilities were assumed as part of the acquisition; and
  • there has been no exploration, development or production activity on the mining assets in the three years (two years for a venture issuer) before the date of the preliminary long-form prospectus.

Corresponding changes to Companion Policy 51-102CP to National Instrument 51-102 Continuous Disclosure Obligations will confirm that the CSA would not consider an acquisition of mining assets to be a business requiring the filing of a business acquisition report, if the conditions set out directly above have been met.

A copy of the CSA Request for Comments, which includes the text of the proposed changes to Companion Policy 41 101CP, can be found here.

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