Proposed Companion Policy: OSC Rule - 41-501 - General Prospectus Requirements and Forms (Repealed by 41-801 on March 17, 2008)
Proposed Companion Policy: OSC Rule - 41-501 - General Prospectus Requirements and Forms (Repealed by 41-801 on March 17, 2008)
ONTARIO SECURITIES COMMISSION COMPANION POLICY 41-501CP
TO ONTARIO SECURITIES COMMISSION RULE 41-501
GENERAL PROSPECTUS REQUIREMENTS
PART 1 GENERAL REQUIREMENTS
1.1 Experience of Officers and Directors(1) - Clause 61(2)(c) of the Act requires the Director to refuse to issue a receipt for a prospectus if it appears that theproceeds received from the sale of securities to be paid to the treasury of the issuer, together with other resources of the issuer, will be insufficient to accomplishthe purposes stated in the prospectus. The Commission is of the view that one major resource is people. A sufficient number of the directors and officers of theissuer should have relevant knowledge and experience so that the Director will not conclude that the human and other resources are insufficient to accomplishthese purposes. If the requisite knowledge and experience is not apparent in the directors and officers, the Director may be satisfied if it is shown that the issuerhas contracted to obtain the knowledge and experience from others.
1.2 Style of Prospectus - Subsection 2.2(1) of Rule 41-501 General Prospectus Requirements (the "Rule") provides that the information contained in theprospectus shall be in narrative form. The Commission is of the view that question and answer or bullet point format are acceptable for this purpose.
1.3 Graphs, Photographs and Maps(2) - Subsection 2.2(5) of the Rule provides that a prospectus may contain a graph, photograph, artwork or map if it isrelevant to the business of the issuer and not misleading. There is no obligation to seek prior approval from staff of the Commission for the inclusion of a graph,photograph, artwork or map in a prospectus prior to the filing of the preliminary prospectus.
1.4 Principal Shareholders(3) - Certain prospectus forms require disclosure of the identity of each principal shareholder of the issuer and, if a principalshareholder is a company, of the identity of the individual, if any, who controls the company. Issuers are therefore advised that they should organize themselvesin a manner which will enable them to obtain and disclose information concerning principal shareholders.
1.5 Certificate of Underwriter in Prospectus(4) - Subsection 59(1) of the Act requires that if an underwriter is in a contractual relationship with the issuer orselling securityholder, the prospectus shall contain a certificate signed by the underwriter in the prescribed form. Among the benefits of an underwriterparticipating in the preparation of a prospectus and the subsequent distribution of the offered securities are the due diligence investigation that the underwriterand its advisers undertake in relation to the business of the issuer and the resulting enhanced quality of disclosure in the prospectus. For that reason, andparticularly in the case of an initial public offering, the Commission encourages underwriter participation in the prospectus process. Issuers are reminded that theDirector has discretion under section 61(1) of the Act to refuse to issue a receipt for a prospectus if it is in the public interest to do so, including in the case of aprospectus that contains disclosure that is considered deficient.
1.6 Disclosure of Selling Securityholders(5) - Item 1.4(6) and Instruction 3 to Item 15 of Form 41-501F1 require that if any of the securities are being offeredfor the account of a securityholder, certain information concerning the securityholder, including the name of the securityholder and the number or amount of thesecurities of the class being offered that are owned by the securityholder, shall be included in the prospectus. In some cases, particularly if there are a largenumber of selling securityholders each selling a small number or amount of securities, it may be desirable to disclose the required information on an aggregate,and not an individual securityholder, basis. In these cases, application for relief from the requirements in the Form must be made to the Director. Beforeconsidering the application, the Director will normally require that the issuer undertake to file with the Commission all of the information required by theInstruction on or prior to filing the prospectus.
PART 2 FINANCIAL MATTERS
2.1 Filings Soon After Year End(6) - Subsection 3.1(1) of the Rule requires that financial statements for the most recently completed financial year end of anissuer be included in a prospectus of the issuer. This requirement applies even if an issuer wishes to file a prospectus shortly after the end of a financial year of theissuer when audited financial statements for the year may not be available. In this situation, it will be necessary for the issuer to apply for relief from therequirement of subsection 3.1(1) under Part 8 of the Rule prior to filing a preliminary prospectus.
2.2 Approval of Financial Statements(7) - Paragraph 3.1(3)(a) of the Rule provides that if the board of directors of an issuer has approved annual or interimfinancial statements of the issuer after the filing of a preliminary prospectus of the issuer, the prospectus shall include the statements. Issuers that are reportingissuers have an obligation under Part XVIII of the Act to prepare and file financial statements as part of their continuous disclosure obligations. The Commissionis of the view that issuers should ensure that financial statements are considered and approved by directors in a timely manner and should not delay the approvaland release of the statements for the purpose of avoiding their inclusion in a prospectus.
2.3 Generally Accepted Accounting Principles(8) - Paragraph 3.2(2)(b) of the Rule provides that if a person or company is incorporated or organized in ajurisdiction other than Canada or a province or territory of Canada, the financial statements of the person or company included in the prospectus may be preparedin accordance with either (a) Canadian GAAP; or (b) generally accepted accounting principles of a jurisdiction other than Canada or a province or territory ofCanada ("foreign GAAP") if the notes to the financial statements explain and quantify any significant differences between the foreign GAAP and CanadianGAAP. The Commission expects that in most cases these reconciliation notes will be adequate to ensure clear and understandable disclosure for purchasers inCanada. However, issuers are reminded that the Director shall refuse to issue a receipt for a prospectus that contains financial statements prepared in accordancewith foreign GAAP if the differences between the foreign GAAP used and Canadian GAAP, either individually or in the aggregate, are such that the financialstatements appear to be misleading as to the financial condition or prospects of the issuer despite the inclusion of the notes referred to in paragraph (2)(b). Thedetermination of whether such a likelihood exists will depend on the facts in each case. In certain cases, the use of foreign GAAP may be acceptable only ifcertain line items in the financial statements are restated in accordance with Canadian GAAP. In cases of doubt, issuers are encouraged to contact Commissionstaff as far as possible in advance of the filing of the preliminary prospectus so as to provide staff with adequate time to consider the matter.
(1) Section 3.3 of the Rule provides that if the issuer has made an acquisition or intends to make an acquisition, as disclosed in the prospectus, of a business andin each case, if the acquisition is or is expected to be material to the issuer, the prospectus shall contain, among other things, financial statements of the acquiredbusiness, a pro forma balance sheet combining the assets and liabilities of the issuer and of the acquired business and a pro forma income statement and proforma statement of changes in financial position for the combined entity. For this purposes, the term "business" should be evaluated in light of the facts andcircumstances involved. Consideration should be given to whether there is sufficient continuity of the acquired entity's operations so that disclosure of priorfinancial information is material to an understanding of further operations. The Commission considers that a separate entity, a subsidiary or a division is abusiness and that in certain circumstances a lesser component of an entity may also constitute a business. In determining whether an acquisition constitutes anacquisition of a business for this purpose consideration should be given to the following factors:
(i) whether the nature of the revenue producing activity will remain generally the same; and
(ii) whether any of the physical facilities, employee base, marketing, sales, customer base, production or operations remain after the acquisition.
(2) Materiality should be determined in the context of the issuer's overall financial position, both prior to and after the acquisition, taking into account bothquantitative and qualitative factors. Materiality is a matter of judgment in the particular circumstances and should generally be determined in relation to thesignificance of the acquisition to investors, analysts and other users of financial statement information. The acquisition of a business will generally be consideredby the Commission to be material to an issuer if it is probable that the omission of information relating to the acquired business from the financial statementswould influence or change an investment decision for the securities of that issuer. Measures of materiality would generally include gross revenues, expenses, netincome, shareholders' equity and total assets of the acquired business relative to those of the issuer. Although this concept of materiality is broader than thedefinition of "material change" contained in the Act, it is consistent with the financial reporting notion of materiality contained in paragraph 1000.17 of theHandbook.
(3) A pro forma balance sheet included in a prospectus under paragraph 3.3(1)(e) of the Rule is required to be as at the date of the most recent financial yearend of the issuer and of the acquired business. In some cases, particularly if considerable time has elapsed or significant events have occurred after the financialyear end of the issuer or of the acquired business, more meaningful disclosure may result by preparing the pro forma balance sheet as at a more recent date ordates.
(4) If an issuer is not required under paragraph 3.3(1)(e) of the Rule to include a pro forma balance sheet in the prospectus but decides to include one on thebasis that a pro forma balance sheet would represent meaningful disclosure, the balance sheet should generally be as at the date at which the balance sheetrequired by subparagraph 3.1(1)(d)(i) of the Rule is made up and should give effect to the issue and sale or redemption or other retirement of securities issued orto be issued by the issuer and to the other assumptions and events on which the pro forma balance sheet is predicated.
2.5 Subsidiaries(11) - An issuer may find it necessary, in order to meet the requirement for full, true and plain disclosure in section 56 of the Act, to includeseparate financial statements of a subsidiary of the issuer in a prospectus even if the financial statements of the subsidiary are included in the consolidatedfinancial statements of the issuer. For example, separate financial statements of a subsidiary may be necessary to explain the risk profile and nature of theoperations of the subsidiary. The existence of a significant investment on a non-consolidated basis, a guarantee by a subsidiary of the obligations of the issuer anda restriction on the ability of a subsidiary to transfer funds to the parent company are other examples of situations for which separate financial statements may benecessary.
2.6 Selected Financial Information(12) - Section 3.1 of the Rule requires that a prospectus of an issuer include audited financial statements of the issuer for eachof the last three financial years. In some instances, it may be desirable to include selected financial information of the issuer for a period of more than three yearsif the information would be helpful to an understanding of trends in the business or financial condition of the issuer. If the selected information is included, thereis no requirement in the Rule that the information be audited.
PART 3 CERTIFICATE OF GUARANTOR
3.1 Certificate of Guarantor(13) - Section 5.2 of the Rule provides that if disclosure concerning a guarantor is required by a prospectus form, the preliminaryprospectus and prospectus shall contain a certificate of the guarantor in the form set forth in subsection 58(1) of the Act. The Commission recognizes that, incertain circumstances, a guarantor may consider that its knowledge of the affairs of the issuer is not such that the guarantor considers it appropriate to sign thecertificate in the specified form. In these circumstances, provided the guarantor is not a promoter of the issuer or a selling securityholder, relief may be availableto the guarantor under Part 8 of the Rule to allow the guarantor to sign a different form of certificate.
PART 4 GENERAL REQUIREMENTS AS TO FILING AND AMENDMENTS
4.1 Consent of Solicitors(14) - The names of lawyers or legal firms frequently appear in prospectuses in two ways. First, the underwriters, the issuer and sellingsecurityholders may name the lawyers upon whose advice they are relying. Second, the opinions of counsel that the securities may be eligible for investmentunder certain statutes may be expressed or opinions on the tax consequences of the investment may be given. In the first case, the Commission is of the view thatthe solicitor is not, in the words of subsection 6.5(1) of the Rule, named as having prepared or certified any part of the prospectus and is not named as havingprepared or certified a report or valuation used in or in connection with a prospectus. Accordingly, the disclosure of interest and written consent of the solicitorrequired by subsections 2.3 and 6.6(1) of the Rule are not required. In the second case, because the opinions or similar reports are prepared for the purpose ofinclusion in the prospectus, the Commission is of the view that subsection 6.5(1) applies and the disclosure of interest and consent are required.
4.2 Material Contracts - Section 6.4 of the Rule requires an issuer to file material contracts at the request of the Director, and to make all material contractsavailable for public inspection during the distribution of the securities. The Commission recognizes that certain material contracts or portions thereof may containsensitive operational or financial information, disclosure of which would be competitively disadvantageous or otherwise detrimental to the issuer. The Directorwill consider granting relief under Part 8 of the Rule where the requirement to make the material contract or portions thereof available for public inspectionwould be unduly detrimental to the issuer and would not be necessary in the public interest.
4.3 Response Letters and Marked-up Copies(15) - It is recommended that a response to a comment letter for a preliminary prospectus include draft wording forthe proposed changes to be reflected in the prospectus. It is also recommended that when the comments of the various securities regulators have been resolved, adraft of the prospectus with all proposed changes from the preliminary prospectus clearly marked be submitted as far as possible in advance of the filing of finalmaterial. These procedures may prevent delay in the issuing of a receipt for the prospectus, particularly if the number or extent of changes are substantial.
4.4 Disclosure of Investigations or Proceedings(16)
(1) Subsection 61(1) of the Act provides that, subject to subsections 61(2) and 63(4), the Director shall issue a receipt for a prospectus unless it appears that itwould not be in the public interest to do so. The existence of an ongoing or recently concluded investigation or proceeding relating to an issuer, a promoter, oran underwriter or other person or company involved in a proposed distribution will be considered by the Director in determining if the Director should refuse toissue a receipt for the prospectus. That decision will be made on a case by case basis and will depend upon the facts known at the time.
(2) If the facts do not warrant the denial of a receipt for a prospectus, the Act nonetheless imposes a statutory obligation to provide full, true and plaindisclosure of all material facts relating to the securities issued or proposed to be issued by the prospectus. Disclosure of an ongoing or recently concludedinvestigation or proceeding relating to a person or company involved in a proposed distribution may be necessary to meet this standard. The circumstances inwhich disclosure will be required and the nature and extent of the disclosure will also be determined on a case by case basis. In making this determination, allrelevant facts, including the allegations that gave rise to the investigation or proceeding, the status of the investigation or proceeding, the seriousness of thealleged breaches that are the subject of the investigation or proceeding and the degree of involvement in the proposed distribution by the person or companyunder investigation will be considered.
4.5 Deleting Warrants and Conversion Features(17) - Section 6.10 of the Rule provides that a conversion feature or warrant disclosed in a preliminaryprospectus may not be deleted from the prospectus unless, before the prospectus is filed, an amendment to the preliminary prospectus has been filed and acceptedand subsection 57(3) of the Act complied with. Issuers are reminded that other changes to the terms and conditions of a security being distributed may constitutea material adverse change requiring an amendment to the preliminary prospectus under subsection 57(1) of the Act.
PART 5 PROCEDURES FOR GRANTING OF RECEIPTS
5.1 Extension of 75 Day Period for Issuance of Final Receipt(18)
(1) Subsection 7.1(2) of the Rule provides that an issuer shall not file a prospectus more than 75 days after the date of the receipt for the preliminary prospectusto which the prospectus relates if the primary reason for the failure to file the prospectus within the 75 day period is the inaction of the issuer. The Commissionconsiders that "inaction" may consist of either failing to make reasonable and timely efforts to make acceptable responses to the comments of staff of theCanadian securities regulatory authorities that are reviewing the preliminary prospectus or, after having satisfactorily dealt with the comments, delaying the filingof final material pending favourable market conditions.
(2) The effect of subsection 7.1(2) of the Rule is to make it possible for the Director to close inactive files, and more importantly, to ensure that issues are notbeing marketed by means of preliminary prospectuses containing outdated information, particularly financial statements. It should be noted that Part 8 of the Rulegives the Director discretion to exempt the issuer from compliance with any provision of section 7.1 if the Director is satisfied that there is sufficient justificationfor so doing.
(3) If the 75 day period has expired and application is made for the Director to exercise the discretion under Part 8 to permit the prospectus to be filed, theDirector will usually require that the prospectus contain up-dated financial statements.
(4) If the period between the issuance of the receipt for the preliminary prospectus and the prospectus exceeds 75 days by more than a few days, theCommission would normally consider it to be in the public interest that either an amended preliminary prospectus containing updated information, includingfinancial statements and including a restatement of the statutory rights of the purchaser and fresh certificates, or a new preliminary prospectus be filed with theCommission. Exceptions may be made if the Director is satisfied that the preliminary prospectus is not being used to market the issue or if the issuer is newlyincorporated or formed and is not yet carrying on business to a significant extent.
(5) The Commission is of the view that the Director should not permit an amended preliminary prospectus to be used to extend the 75 day period unless theissuer is continuing to use its best efforts to finalize and file the prospectus and obtain a receipt.
5.2 Project Financings(19) - Certain project financings are made by issuers that are unincorporated associations or co-tenancies comprised of securityholders. Inthe view of the Commission, it is not appropriate for an unincorporated association or co-tenancy comprised of securityholders to be responsible for compliancewith the continuous disclosure obligations under the Act, including financial reporting requirements, given the passive nature of the investment and the absence ofdirectors and officers who might appropriately assume this responsibility. The Commission is of the view that it would normally be appropriate for the person orcompany owning the property prior to the issue of securities representing ownership interests in the property (a so-called "promoter-vendor") or other persons orcompanies benefiting from the distribution or the project to assume responsibility for the issuer's continuous disclosure obligations.
1. Source: OSC Policy 5.1, s.1.
2. Source: New.
3. Source: Interpretation Note 2, 1983 OSCB 4536. The term "principal shareholder" is defined in Rule 14-501 Definitions. The definition is, if used to indicatea relationship with a person or company, "a person or company that is the direct or indirect registered owner or beneficial owner of more than 10 percent of anyclass or series of voting securities".4. Source: OSC Policy 5.1, s.12.
5. Source: New.
6. Source: New.
7. Source: New.
8. Source: New.
9. Source: OSC Policy 5.1, s.23(a) and (b) and NP 47.
10. Source: Regulation s.55.
11. Source: Regulation s.62.
12. Source: New.
13. Source: New. Conforms to the approach taken in NP 47.
14. Source: Uniform Act Policy 2-04.
15. Source: OSC Policy 5.7, Part A, s.10.
16. Source: OSCN (1990), 13 OSCB 598.
17. Source: OSC Policy 5.1, s.10.
18. Source: OSC Policy 5.1, s.11.
19. Source: OSC Policy 5.1, s.16.