Highlights Of OSC Corporate Finance Branch 2020 Annual Report – Corporate/Commercial Law


Highlights Of OSC Corporate Finance Branch 2020 Annual Report

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The Ontario Securities Commission (OSC) recently published OSC Staff Notice 51-371 Corporate Finance
Branch 2020 Annual Report
(the “2020
“). The 2020 Report summarizes the Corporate
Finance Branch’s operational and policy work for the fiscal
year ended March 31, 2020, and provides important guidance that can
help issuers provide sufficient disclosure and reduce the risk of
refilings or delays in capital markets transactions. Notably, the
2020 Report provides specific guidance about the impacts of
COVID-19 on issuers’ disclosure obligations.

Continuous Disclosure

Each year, the OSC reviews the full continuous disclosure record
of a select group of Ontario-based reporting issuers to assess
whether they are complying with their disclosure obligations. The
OSC also conducts “issue-oriented” reviews that focus on
specific accounting, legal or regulatory issues the OSC determines
warrant enhanced regulatory scrutiny. For the fiscal year ended
March 31, 2020, some form of immediate disclosure, such as a
refiling, was required in 17% of full reviews and 29% of
issue-oriented reviews to address material deficiencies identified
by OSC Staff. OSC Staff also reviews issuers’ continuous
disclosure that is incorporated by reference into a short form or
base shelf prospectus. Material deficiencies in issuers’
continuous disclosure can, therefore, also delay financing

The 2020 Report, together with prior reports, contain valuable
guidance about the OSC’s expectations regarding key areas of
focus that can assist reporting issuers in reducing the likelihood
of a refiling or unexpected delays in financing transactions. The
2020 Report also includes specific guidance about disclosure of the
impacts of COVID-19 that may be particularly important for issuers
who may seek to raise capital while the pandemic is ongoing. Some
of the key areas of focus in the 2020 Report with respect to
continuous disclosure include:

  • Management’s Discussion and Analysis. The quality
    of disclosure in MD&A continues to be a key focus of the OSC,
    as it views MD&A as the cornerstone of an issuer’s overall
    financial disclosure. The OSC continues to identify the use of
    incomplete or boilerplate disclosure as a material deficiency,
    particularly with respect to liquidity and capital resources,
    factors underlying variances in financial statement line items and
    risks and uncertainties. The 2020 Report provides specific guidance
    related to disclosure of COVID-19 impacts in each of these

  • Non-GAAP Financial Measures. As described in our
    February 25, 2020 Update, Canadian Securities Administrators Publish
    Second Notice and Request for Comment on New Rules and Disclosure
    of Non-GAAP and Other Financial Measures
    , the Canadian
    Securities Administrators (CSA) are in the process of implementing
    new rules regarding the disclosure surrounding non-GAAP financial
    measures. In the 2020 Report, the OSC continues to express concern
    about the prominence given to disclosure of non-GAAP financial
    measures and the lack of transparency and appropriateness about the
    various adjustments made in calculating non-GAAP financial
    measures. The OSC also cautions issuers to be mindful when defining
    adjustments or alternative profit measures as “COVID-19
    related” or describing COVID-19 impacts that extend over
    multiple reporting periods as non-recurring, infrequent or

  • Forward-Looking Information (FLI). The OSC continues
    to identify deficiencies in FLI disclosure, including lack of a
    balanced discussion of the key assumptions used and risk factors
    inherent in FLI. In the 2020 Report, the OSC highlights a number of
    key questions for issuers to consider in light of COVID-19,
    including whether previously disclosed FLI needs to be updated in
    light of the impacts of COVID-19.

  • Other Areas of Focus. The 2020 Report indicates that
    diversity, technical disclosure in mining reports, corporate
    governance in the cannabis industry (and other emerging growth
    industries) and climate change disclosure will continue to be areas
    of focus moving forward.

Prospectus Offerings

The OSC reviews prospectuses to ensure the disclosure in the
prospectus (including any documents incorporated by reference in
the prospectus) meets applicable disclosure standards. Much of the
guidance regarding issuers’ continuous disclosure discussed
above is relevant to disclosure included in a prospectus. The 2020
Report includes additional guidance resulting from the OSC’s
prospectus reviews, which can be valuable for issuers undertaking
or planning public financings or other capital markets transactions
that require prospectus-level disclosure:

  • Confidential Pre-Filings. As described in our March 9,
    2020 Update, Canadian Securities Administrators to Allow
    Confidential Prospectus Reviews
    , issuers may now
    confidentially pre-file a prospectus with the OSC for review before
    publicly filing and announcing a proposed offering. Many of the
    substantive disclosure matters highlighted in the 2020 Report may
    be best addressed in confidential pre-file discussions between
    issuers and OSC Staff to avoid delays at the time of filing a
    prospectus. Confidential prospectus pre-filings have become an
    important tool in securities offerings, and we expect their use to
    increase over time. However, issuers are cautioned that the OSC may
    decline to review a draft preliminary prospectus if it is not at an
    appropriate stage for a pre-filing.

  • Primary Business in an IPO. The disclosure
    requirements for an issuer’s “primary business”
    remain under consideration by the OSC as part of its ongoing policy
    initiative to reduce regulatory burden. In the interim, an IPO
    prospectus must include a complete three-year financial history
    (two years for an IPO venture issuer) of the primary business that
    investors are investing in, including acquisitions during that
    period (or probable acquisitions) even if they are not
    “significant acquisitions” within the meaning of
    securities laws. Issuers may seek to address specific primary
    business fact patterns through a confidential pre-filing with the

  • Sufficiency and Use of Proceeds. The 2020 Report
    highlights concerns about the sufficiency of proceeds raised in
    public offerings and disclosure of the use of those proceeds. The
    OSC can refuse to issue a receipt for a prospectus if the proceeds
    of the offering, together with the issuer’s other resources,
    are insufficient to accomplish the purpose of the offering or if
    the issuer cannot demonstrate its ability to continue as a going
    concern. Inadequate disclosure can lead to unnecessary delays in
    completing an offering. These issues may be especially relevant for
    technology or other companies that don’t generate meaningful
    cash flow, or issuers adversely impacted by COVID-19.

  • Cannabis Industry. The 2020 Report contains extensive
    guidance for issuers in the cannabis industry and other emerging
    growth industries, including the psychedelic drug industry. The OSC
    will continue to scrutinize disclosure by these issuers to ensure
    that it is balanced and appropriately addresses the risks and
    uncertainties associated with these industries.

  • Testing the Waters Exemption. The OSC continues to
    evaluate whether changes to Canadian rules governing marketing of
    public offerings are warranted in light of the expanded
    “testing the waters” exemption recently adopted in the
    United States. Market participants are encouraged to contact OSC
    Staff with questions relating to this issue in the interim.

The 2020 Report also includes guidance about disclosure
standards for reverse takeover transactions, issuers with hybrid
business structures, audit reports, audit committees and follow-on
offerings by so-called “blind pool” issuers.

Ongoing Policy Initiatives

The 2020 Report highlights a number of policy initiatives the
OSC recently adopted, including codification of rules relating to
at-the-market offerings, amendments to the test for determining
whether an acquisition is “significant”, and pre-filing
reviews of mining technical disclosure. The 2020 Report also
provides an update on a number of ongoing policy initiatives,
including a potential alternative prospectus model, adoption of an
“access equals delivery” model for delivery of certain
continuous disclosure documents by non-investment fund reporting
issuers, an ongoing review of automatic securities disposition
plans, and proposed amendments to the offering memorandum
prospectus exemption.

Please contact any member of our Corporate Finance and Securities Group to
discuss how any of the issues raised in the 2020 Report may impact
your company.

The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.

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