The Canadian Securities Administrators is seeing some initial public offering prospectuses that don’t pass the smell test, and the CSA has issued a staff notice spelling out what it considers when deciding whether to approve an IPO prospectus.

The notice, published in Friday’s OSC Bulletin, indicates that securities regulators have encountered a number of IPOs with share structures “that lead us to question whether those share structures are contrary to the public interest.” In such cases, the CSA generally recommends denying approval for the prospectus.
 
The notice says that an IPO by a company that has already issued an unusually large number of shares for nominal cash consideration (or for assets or business development where the value is not readily supportable) may raise public interest concerns. These concerns are heightened when the business has a limited history of operations, or the IPO financing is relatively small, the CSA says.

“We are concerned with these structures because: the large number of nominally priced shares can create a platform for future market manipulation, and the dilution of invested capital caused by existing shares issued for nominal amounts means that IPO investors receive an unconscionably low percentage of ownership compared to the amount of capital they are investing,” the CSA explains.

The TSX Venture Exchange and the CNSX have both published notices setting out guidelines that aimed to address these issues. However, as the regulators still encounter these issues, the CSA says “it is still appropriate for us to tell the market that we may also object to an issuer’s share structure”.

The notice goes on to explain the factors the CSA considers when assessing a proposed share structure in an IPO, in an effort to give the market some guidance in the area.

IE