OSC Sets Out Interpretative Guidance In Its Corporate Finance Branch Annual Report For 2020 – Corporate/Commercial Law

The overview of the OSC Corporate Finance Branch’s
operational and policy work over the course of the fiscal year
ended March 31, 2020 provides helpful guidance to market

The Ontario Securities Commission (OSC) Corporate Finance Branch
has published its annual report (Report) which sets out the
OSC’s expectations and interpretation of regulatory
requirements with respect to capital raising and continuous
disclosure matters. The Report is based on the work conducted by
the OSC during the fiscal year ended March 31, 2020, particularly
with respect to the 1,100 reporting issuers overseen by the OSC, as
principal regulator. Notably, in fiscal 2020, 388 prospectuses were
filed in Ontario, with mining, cannabis and real estate issuers
being the most active. This represents a decline in the number of
prospectuses filed in Ontario as compared to fiscal 2019, which the
OSC attributes to a decline in offerings in the cannabis space and
the impact of COVID-19 in early-2020. Based on market
capitalization, issuers in the banking, mining and technology
industries represented 49% of the reporting issuers under the
OSC’s mandate.

Guidance for Issuers

As in year’s past, this year’s Report provides helpful
guidance and reminders to market participants with respect to a
number of topics:

Primary Business in an IPO

While the disclosure requirements for an issuer’s primary
business are one of the areas currently under consideration as part
of the OSC’s burden reduction initiative, until
the project is completed, the guidance issued for primary business
analysis in OSC Staff Notice 51-728 Corporate Finance
Branch 2016-2017 Annual Report
continues to apply. As
such, the OSC continues to require that an issuer include in a
long-form prospectus the three-year financial history (two years
for venture issuers) of those businesses acquired by the issuer (or
that will likely be acquired) if those businesses are “in the
same primary business of the issuer”. The OSC’s
interpretation of the financial statement requirements of Form
41-101F1 Information Required in a Prospectus has, in some
cases, been broader than that taken in other jurisdictions,
requiring audited historic financial statements to be in a
prospectus for acquisitions that may not otherwise be considered
significant. As fewer acquisition will be considered significant as
a result of recent amendments to the significant acquisition
, issuers are cautioned to carefully consider whether
financial statements for non-significant acquisitions must be
included in a prospectus as a result of the OSC’s primary
business interpretation.

Asset vs. Business Acquisitions

Also related to IPO financial statement requirements, as well as
significant acquisition determinations, issuers are reminded that
the tests for determining whether an acquisition is an asset or
business acquisition are different under accounting rules and
securities laws. As such, issuers must make a determination under
securities laws as to whether an acquisition is a business
acquisition which may have a different result than under accounting
policies. The OSC generally views the acquisition of licenses,
patents, royalties and intellectual property as
“business” acquisitions for securities law purposes, as
the revenue producing activity or potential revenue producing
activity remains the same.

Sufficiency of Proceeds and Financial Condition of an

When reviewing a prospectus, the OSC will consider, among other
things, whether the aggregate proceeds being raised, together with
the issuer’s other resources, are sufficient to accomplish the
purpose of the offering as stated in the issuer’s prospectus. A
prospectus should include clear disclosure with respect to use of
proceeds and the issuer’s financial condition, including
liquidity concerns. Additional disclosure may be requested by the
OSC, including with respect to negative cash flows, working capital
deficiencies, net losses and significant going concern risks. Where
representations about an issuer’s ability to continue as a
going concern are inconsistent with the issuer’s historical
statements of cash flows, the OSC may request that a cash flow
forecast or financial outlook be included to support the expected
period of liquidity. However, disclosure may not be sufficient to
satisfy the OSC’s concerns and a receipt may be refused.
Similar considerations will be given to a base shelf prospectus and
particular concern will arise where it appears that the
issuer’s cash flow is insufficient to continue operations or
satisfy developmental milestones for the next 12 months.

Confidential Pre-File Review of Prospectuses

As of the date of the Report, the OSC had reviewed 21
confidential pre-file prospectuses filed in accordance with CSA Staff Notice 43-310 Confidential Pre-file
Review of Prospectuses (for non-investment fund issuers)
Issuers are reminded to carefully consider whether the draft
preliminary prospectus is at an appropriate stage for confidential
pre-file. A draft may not be ready for review where the disclosure
falls short of the standard required for a preliminary prospectus,
there is no significant prospect of a near-term transaction, or the
terms and conditions of the offering (and any related transaction)
have yet to be settled.

Timing for Inclusion of Financial Statements (IPO Venture

Annual financial statements required to be included in a
long-form prospectus are for completed financial years ended more
than 90 days before the date of the prospectus for non-venture
issuers and 120 days before the prospectus for venture issuers.
Similar requirements apply to interim financial statements (45 days
and 60 days). Notably, however, “IPO venture issuers” do
not benefit from the extended deadlines applicable to venture
issuers (i.e., existing reporting issuers) and must comply with the
standard financial statement deadlines (90 days for annual
financials and 45 days for interim financials). As a reminder, an
“IPO venture issuer” is an issuer that (a) files a long
form prospectus, (b) is not a reporting issuer in any jurisdiction
immediately before the date of the final long form prospectus, and
(c) as at the date of the long form prospectus, does not have any
of its securities listed or quoted, has not applied to list or
quote any of its securities, and does not intend to apply to list
or quote any of its securities, on the TSX, the NEO Exchange, a
U.S. marketplace, or a marketplace outside of Canada and the US,
other than AIM or PLUS. As set forth in the Report, an RTO
acquirer, being the target in a reverse takeover transaction, will
also be subject to the standard financial statement deadlines.

Cannabis Industry

Issuers considering entering the cannabis industry or making new
investments in the cannabis industry are reminded that
announcements of these opportunities must be balanced and not
potentially misleading to investors. Issuers who are substantially
dependent on licenses to cultivate or sell cannabis, or on leased
facilities in which those activities are performed, should file the
related licenses/agreements as material contracts on SEDAR.
Specific guidance for issuers operating in the cannabis industry in
Canada is also included in the Report which, among other things,
suggests that disclosure of investments in cannabis-related
activities should be qualified, where appropriate, by specific risk
factor disclosure.

Psychedelics Industry 

Recently, there has been an influx of issuers involved in the
psychedelic drug industry. Given the illegality of psychedelic
drugs in various countries, the OSC has indicated that issuers
engaged in activities related to psychedelic drugs should have
clear disclosure regarding the regulatory, licensing and legal
framework(s) under which the issuer operates. OSC Staff expect to
see risks associated with the business appropriately identified,
understood and managed by the issuer’s board of directors.
Issuers may consider analogous disclosure to the expectations set
out in CSA Staff Notice 51-352 (Revised) Issuers with
U.S. Marijuana-Related Activities
. Issuers in the
psychedelic industry are encouraged to consult with OSC Staff on a
pre-file basis to discuss the appropriate level of disclosure and
any other novel considerations that may arise.

Automatic Securities Disposition Plans

As previously discussed, in late 2019, the CSA
had announced that it would review ASDPs to ensure they remain a
legitimate trading mechanism by insiders and do not undermine the
fairness of the Canadian capital markets. In the same announcement,
the CSA indicated that it would be unlikely to recommend new
insider reporting relief for trades under ASDPs. The CSA continues
to consider its approach to ASDPs and remains unlikely to recommend
insider reporting relief for trades under ASDPs.

Continuous Disclosure Review Program

The Report also discusses the outcomes of the OSC’s
continuous disclosure review program. Where the OSC conducted a
full continuous disclosure review of an issuer, in the vast
majority of cases, prospective disclosure enhancements were
required as opposed to immediate action. Issuers involved in an
issue-oriented review were more likely to be required to take
immediate action to remedy an issue identified by the OSC,
particularly where deficiencies were identified among several

The Report also highlights a number of areas where issuers’
disclosure could be improved, including a number of areas specific
to the impact of COVID-19. This guidance is similar to that found
in CSA Multilateral Staff Notice 51-361
Continuous Disclosure Review Program Activities for the fiscal
years ended March 31, 2020 and March 31, 2019
, as we have
previously discussed.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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