Use of Proceeds and Financial Condition

Certain disclosure is required to be included in a prospectus which is set out in:

We also remind issuers that under subsection 61(2)(c) of the Securities Act (Ontario), the Director will refuse to issue a receipt for a prospectus if it appears to the Director that the proceeds from the offering and the issuer’s other resources are insufficient to accomplish the purpose of the offering stated in the prospectus.

General Disclosure Issues

Issuers are required to describe in reasonable detail each of the principal purposes, with approximate amounts, for which the issuer will use the net proceeds of an offering. The following are examples of disclosure that is generally not sufficient to describe the use of proceeds:

  • the principal purpose of the offering is simply described as for general corporate purposes or for working capital,
  • a significant portion of the remaining proceeds is not allocated to any purpose, and
  • when the proceeds are allocated among specific purposes, the prospectus also includes disclosure indicating that management has broad discretion concerning the use of proceeds and that there is no assurance that the proceeds will be used in this manner.

In those rare instances where an allocation of proceeds is not appropriate, issuers should explain management’s reasons for not allocating the funds and the purpose of the offering.

Mining Issuers

Issuers in the mining sector must also provide disclosure about mineral projects that supports the disclosure in their NI 43-101 technical reports. Issuers are asked to enhance the disclosure in the prospectus when:

  • there are inconsistencies between the disclosure in the prospectus and the recommended work plan in the technical report, or
  • there is insufficient disclosure in the prospectus to support the disclosure in the technical report.

Sufficiency of Proceeds and Financial Condition of an Issuer

A critical part of every prospectus review is considering an issuer's financial condition and intended use of proceeds. 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, including any liquidity concerns.

In some instances, an issuer's representations about its ability to continue as a going concern and the period during which it expects to be able to continue operations may be inconsistent with the issuer's historical statement of cash flows (in particular, its cash flows from operating activities). In these cases, we may request that the issuer provide us with a cash flow forecast or financial outlook-type disclosure to support its assumed period of liquidity (i.e., ability to continue operations). However, disclosure on its own may not be sufficient to satisfy receipt refusal concerns in certain circumstances.

For issuers filing a base shelf prospectus, we may take the view that the structure of a base shelf prospectus is not appropriate given the issuer's financial condition and uncertainty of financing. Typically, receipt refusal concerns on financial condition arise if the issuer does not appear to have sufficient cash resources to continue operations for the next 12 months or to meet concrete developmental milestones expected to be completed in the next 12 months. In these cases, to address our concern that incremental drawdowns may be insufficient to satisfy the issuer's short term liquidity requirements, we may request that the issuer:

  • withdraw the base shelf and file a short form prospectus with a minimum subscription amount,
  • withdraw the base shelf and file a short form prospectus with a fully underwritten commitment, or
  • arrange for additional committed sources of financing.

Issuers, including those filing a base shelf or non-offering prospectus, should review CSA Staff Notice 41-307 Corporate Finance Prospectus Guidance -- Concerns regarding an issuer's financial condition and the sufficiency of proceeds from a prospectus offering.

Potential Acquisitions

We often encounter during our reviews prospectuses that indicate that a principal purpose of the offering is for potential acquisitions, but contain little or no disclosure about these potential acquisitions. Instead, the prospectuses have contained disclosure to the effect that:

  • the issuer is currently evaluating various potential acquisition opportunities, some of which would, if consummated, have a material impact on the issuer,
  • although no commitments have been made with respect to any transaction, there have been significant discussions in certain cases, and
  • an agreement on one or more acquisition transactions may be reached shortly following the closing of the offering, in which case all or a portion of the net proceeds of the offering may be allocated to effect those acquisitions.

For disclosure relating to potential acquisitions that are otherwise not described in the prospectus, we may request details such as:

  • a description of the potential acquisitions, including, for example, a description of the businesses or entities involved, a description of the discussions with shareholders or management and clarification on whether the issuer has entered into any agreements in principle, letters of intent or other similar arrangements and whether they are binding or non-binding,
  • the anticipated material impact of these potential acquisitions on the issuer, including a description of how the issuer has concluded that the potential acquisitions are not probable acquisitions or that information relating to the potential acquisitions should not otherwise be considered material to an investor,
  • the criteria management uses to identify potential acquisitions, and/or
  • how the proceeds of the offering will be invested or used pending the completion of an acquisition.