Canadian securities regulators say that they may not approve proposed offerings in cases where they are worried about an issuer’s liquidity.
In a new staff notice published Friday by the Canadian Securities Administrators, regulators warn issuers that in cases where they have concerns regarding the financial condition of an issuer, and/or the sufficiency of proceeds in a proposed offering, these concerns may lead staff to recommend against receipting a prospectus. The notice describes issues that have arisen in past prospectus reviews and explains the types of comments that the regulators have raised about an issuer’s financial condition and/or the sufficiency of proceeds.
“We recognize the importance of capital formation in Canada, and this guidance is not intended to inhibit capital raising through a prospectus offering other than where there are significant investor protection concerns,” it says.
However, it also indicates that consideration of an issuer’s financial condition is a critical part of every prospectus review. And, while a prospectus must contain clear disclosure on how the issuer intends to use the proceeds raised in the offering as well as disclosure of the issuer’s financial condition, “disclosure on its own may not be sufficient to satisfy receipt refusal concerns in certain circumstances.”
For example, it says that a recommendation of receipt refusal “may be appropriate where an issuer lacks sufficient funds to continue operations, or if the proceeds from the prospectus offering will be insufficient to accomplish the purpose of the offering.”
In order to assess whether there is genuine concern that could lead regulators to refuse a prospectus receipt, they may ask an issuer to provide a written representation of the number of months that it will be able to continue its operations given its financial condition, and that this be disclosed in the prospectus. If that forecast doesn’t seem reasonable, the regulators may also request that the issuer provide a cash flow forecast to support its assumed period of liquidity, and that may require additional prospectus disclosure too. Ultimately, serious concerns about an issuer’s immediate viability may lead regulators to refuse to approve a prospectus altogether.
The guidance applies to issuers that have short-term liquidity concerns and/or offerings that do not appear to be raising sufficient proceeds, and it applies to all prospectus reviews, regardless of whether the offering is an IPO, new issue or secondary offering.