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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Canada | Publication | August 23, 2021
Financial statements in a long-form prospectus must include the financial statements of the issuer plus any business or businesses acquired by the issuer within the past three years (two years for venture issuers) or proposed to be acquired, if a reasonable investor would regard the issuer’s primary business to be the business or businesses acquired or proposed to be acquired.
The purpose of the requirement is to ensure investors have a complete financial history of the issuer.
On August 12, the CSA published, for a comment period expiring on October 11, 2021, Proposed Changes to Companion Policy 41-101CP to National Instrument 41-101 General Prospectus Requirements (CP 41-101). The purpose of these changes is to provide guidance, in relation to an acquired business, as to the specific statements that must be included in a long-form prospectus.
These proposed changes are also intended to discourage discussions with CSA staff, which may result in inconsistent interpretations. Issuers who still have questions about which financial statements should be included in a prospectus, what additional information may be required in a prospectus in order to meet the requirement for full, true and plain disclosure, or which entities should be considered as forming the basis of the issuer’s business are advised, instead, to use the pre-filing procedures set out in National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions.
The key proposed changes are summarized below.
Examples of when a reasonable investor would conclude that an acquired business is the primary business of the issuer are when the acquisition was:
The proposed changes to CP 41-101 add the following two examples:
Two specific, fact-based examples have been included to help issuers determine the circumstances where:
Guidance to help determine whether predecessor entities form or will form the basis of the issuer’s business has been added. The example used to illustrate this guidance is an issuer incorporated as a REIT that acquired four rental properties immediately prior to or concurrently with the closing of its IPO. The guidance concludes that financial statements for each of the rental properties are required.
In the case of an issuer that has incurred significant growth through a series of pre-IPO acquisitions such that it has an insufficient financial history of the primary business, the proposed changes include guidance as to what additional information should be included in the prospectus, such as property or business valuation reports and forecasted cash flow information.
The rules around significant acquisitions and business acquisitions as applicable to non-reporting issuers are confirmed as being substantively the same as those applicable to reporting issuers. The proposed changes refer issuers to the existing “decision tree” set out in Chart 2, Appendix A to CP 41-101 as a source of guidance.
The proposed changes will clarify that an acquisition of mining assets will not be considered to be a business requiring financial statements if all of the following apply:
Corresponding changes to Companion Policy 51-102CP to National Instrument 51-102 Continuous Disclosure Obligations will confirm that the CSA would not consider an acquisition of mining assets to be a business requiring the filing of a business acquisition report, if the conditions set out directly above have been met.
A copy of the CSA Request for Comments, which includes the text of the proposed changes to Companion Policy 41 101CP, can be found here.
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