NIN 99/31 - General Prospectus Requirements - OSC Proposed Rule 41-501 and Form 41-501F1 [NIN - Rescinded]

The Commission is seeking comment on the Ontario Securities Commission’s proposed Rule 41-501 - General Prospectus Requirements, Companion Policy 41-501CP and Form 41-501F1 - Information Required in a Prospectus (together the "OSC General Prospectus Proposal"). The OSC originally published the OSC General Prospectus Proposal for comment in May 1997 and, after making revisions, republished it for comment on July 23, 1999. The full text can be found at the OSC Web site at www.osc.gov.on.ca.

Background

The OSC General Prospectus Proposal is currently proposed for adoption in Ontario only but should be of interest to British Columbia market participants for two reasons. First, it would affect prospectus offerings by British Columbia issuers that are qualified for distribution in Ontario. Second, it could form the basis for a set of national prospectus requirements adopted in all provinces, including British Columbia. The Commission is seeking comment, firstly, on the impact of the OSC General Prospectus Proposal if adopted in Ontario only and, secondly, if it were also adopted in British Columbia as part of new national prospectus requirements.

The OSC General Prospectus Proposal contains a number of provisions that are significantly different from current requirements in B.C. This notice briefly highlights and seeks comment on some of these differences.

Highlights of Differences in Approach

1. Financial Statement Requirements

The approach to financial statement requirements in the OSC General Prospectus Proposal differs in a number of material respects from the approach in British Columbia. Specifically:

• It is proposed that only 3 years of audited financial statements be required (while the current B.C. requirement is 5 years, in practice staff routinely permits only 3 years).
  
• The OSC Notice seeks comment on a proposal to allow a "Junior Issuer" (an issuer whose revenue, assets, shareholder equity and market capitalization are all less than $5 million) to provide audited statements for the issuer’s most recent financial year and to provide unaudited statements supported by a comfort letter for the prior 2 financial years (Part 4 of Local Policy Statement 3-02 presently waives the historical audit requirement subject to the most recent financial year being audited and prior years being subject to a review engagement report). 
  
•  It is proposed that, if preliminary or final prospectuses are filed within 90 days after the issuer’s fiscal year end, the issuer need not include audited financial statements for its last financial year unless the board of directors has approved the financial statements, the statements have been filed with the OSC or the statements have been released to the public (currently, in B.C., audited financial statements for the issuer’s last financial year are required but staff generally grant relief if the preliminary or final prospectus is filed within 60 days of year end, subject to the same conditions as in the OSC General Prospectus Proposal).
  
• It is proposed that a preliminary or final prospectus be required to include unaudited financial statements supported by a comfort letter for interim periods (3, 6 or 9 months) ended more than 60 days before the date of the prospectus (currently, in B.C., where the date of the preliminary prospectus is more than 120 days from the date of the issuer’s most recent audited year end financial statements, the required stub period statements may be unaudited but must be accompanied by a review engagement report, or, if B.C. is not the principal regulator, a comfort letter).
  
• It is proposed that unaudited annual financial statements for the issuer’s last financial year, accompanied by a comfort letter, may be included in a prospectus instead of statements for the most recent interim periods if the prospectus is filed within 90 days of the issuer’s last financial year end (currently there is nothing comparable in B.C.).
  
• A sliding scale approach to business acquisition disclosure is proposed, under which the more significant the acquisition is to the issuer, the more historical financial information about the acquired business would be required:

This approach is similar to the SEC approach for financial information of an acquired business (currently, in B.C., under Part 4.2(b) of LPS 3-02, financial statements of the acquired business are required for a minimum of three years (in all cases) if the proceeds are to be applied directly or indirectly to finance the acquisition of a business or to finance the operation of that business).

• Financial statements of a guarantor or credit supporter are required, subject to certain exemptions, if the issuer is a wholly owned subsidiary of the guarantor (currently, in B.C., financial statements of guarantor are only required if debt securities are being issued).
  
• The financial statement requirements are tied to the filing of both the preliminary and final prospectus (currently, in B.C., the financial statement requirements in the Securities Rules are tied to the filing of the preliminary prospectus but Part 4.2(d) and 4.4(a) of LPS 3-02 updated financial statements for the final prospectus where the most recent statements are stale.).

2. Differences in Non-Financial Statement Requirements

In addition to the issues in 41-501 relating to financial statement requirements, there are several other areas of difference. For example,

• Only material contracts that create or materially alter the rights and obligations of holders of the securities being distributed are required to be filed. In addition, OSC Proposed Rule 41-501 provides for the non-public delivery to the regulators of the underwriting or agency agreement (in B.C. all material contracts are filed and publicly available through SEDAR, subject to the right to request confidential treatment under section 169(4) of the Act).
  
• No underwriter is required to participate in any type of offering, subject to face page disclosure if no underwriter is involved (currently in B.C., with limited exceptions, an underwriter is required).

3. Differences in Prospectus Forms

The approach to prospectus disclosure in the OSC General Prospectus Proposal differs in a number of material respects from the approach in British Columbia. Specifically:

• OSC Proposed Form 41-501F1 consolidates the existing Ontario prospectus Forms 12, 13 and 14 currently used by issuers to file a long form prospectus and does not distinguish between junior and senior issuers (B.C. Forms 12A and 14A contain disclosure requirements that apply only to junior issuers (as defined in Forms 12A and 14A).
  
• Disclosure of executive compensation as required by Form 40 is required (B.C. Forms 12A and 14A require similar disclosure, however they also require disclosure of executive compensation that the issuer anticipates it will pay during the 12 month period following completion of the offering).
  
• OSC Proposed Form 41-501F1 does not require disclosure relating to the issuer’s business objectives that it expects to accomplish using the funds available, the time period in which these business objectives are expected to be accomplished, a description of the significant events that must occur for the business objectives to be accomplished, the time periods in which the events are expected to occur and the related costs to each event (this disclosure is required in B.C. Form 12A).
  
• OSC Proposed Form 41-501F1 does not require disclosure relating to the issuer’s estimate of aggregate monthly and total administrative costs, by type of cost, that it expects to incur in order to achieve its stated business objectives (this disclosure is required in B.C. Forms 12A and 14A).
  
• OSC Proposed Form 41-501F1 does not require disclosure of the use of all available funds, consisting of the proceeds of the offering combined with issuer’s existing working capital (estimated) (this disclosure is required in B.C. Forms 12A and 14A).
  
• OSC Proposed Form 41-501F1 does not require disclosure in the use of proceeds table or elsewhere in the prospectus of whether the issuer will have sufficient funds to cover estimated administrative costs over a 12 month period after completion of the offering (this disclosure is required in B.C. Forms 12A and 14A).
  
• Disclosure of all corporate cease trade orders and bankruptcies where the director, officer or control person of the issuer has been a director, officer or promoter of any other cease traded or bankrupt reporting issuer (B.C. Forms 12A and 14A require the same disclosure for promoters or other members of management, in addition to directors and officers, if the cease trade order was issued or the bankruptcy occurred within the 5 year period prior to the date of the prospectus).
  
• Disclosure of all sanctions and penalties imposed by a court or securities regulatory authority against any director, officer or control person of the issuer where the information is likely to be important to an investor (B.C. Forms 12A and 14A require similar disclosure for promoters or other member of management, in addition to directors and officers, if the sanction or penalty has been imposed within the 10 year period prior to the date of the prospectus and the penalty or sanction relates to trading in securities, promotion or management of a publicly traded issuer, or theft or fraud).
  
• Disclosure of individual bankruptcies where any director, officer or control person of the issuer is, or within the 10 year period prior to the date of the prospectus, has been declared bankrupt or made a voluntary assignment in bankruptcy, made a proposal under any legislation relating to bankruptcy or solvency, or has been subject to or instituted any proceedings with creditors (B.C. Forms 12A and 14A require similar disclosure for any promoter or other member of management in addition to directors and officers, but only if the event occurred within the past 5 year period).

Specific Requests for Comment

The Commission encourages market participants to provide comments to both the OSC and to the Commission on any aspect of the OSC Proposed Rule 41-501 or OSC Proposed Form 41-501F1. In addition, the Commission seeks responses to the following specific questions:

Questions relating to financial statement requirements

1. Unlike the comfort letter regime suggested in the OSC General Prospectus Proposal, a review engagement report informs investors of a public accountant’s involvement with the financial statements, provides the investor with an indication of the level of comfort that can be placed on the unaudited statements and provides investors with direct recourse against the public accountant because a consent letter would be required to be filed. The public accountant would only face liability if the review is not performed in accordance with applicable standards.

(a) Is the inclusion in a prospectus of a review engagement report considered useful to clarify the association of the public accountant with any unaudited financial statements?

(b) Is it appropriate that a public accountant be liable to investors under section 131 of the Securities Act for a material misrepresentation resulting from the public accountant’s negligence in conducting a review of the unaudited financial statements included in a prospectus?

2. What significant problems, if any, have filers and public accountants experienced with the SEC "sliding scale" model?

3. Will the "rolling" 12 month feature of the "sliding scale" model as discussed in the OSC General Prospectus Proposal create any significant problems for issuers in determining the number of years of audited financial statements for an acquired business that will be required in a prospectus or timing problems in connection with a prospectus filing subsequent to the acquisition?

4. Will one year of financial statements on acquired businesses, as proposed under the "sliding scale" model, provide users with adequate information?

Questions relating to material contracts

5. Should all material contracts, subject to the right to request confidentiality, be available to all market participants?

Questions relating to underwriters

6. Should a prospectus always contain an underwriter’s certificate or only in the case of an IPO, or only in the case of an IPO by a junior issuer?

Questions relating to additional prospectus disclosure for junior issuers

7. Should there be a separate specified form of prospectus for junior issuers (as defined in Form 12A and 14A)? Do issuers and their professional advisers find the guidance provided by the additional instructions in Form 12A and 14A (which is not included in the OSC’s General Prospectus Proposal) useful?

8. Should the specified form of prospectus mandate disclosure in connection with proposed payments to insiders, business objectives and milestones, estimated administration costs or incorporating the issuer’s current working capital position into the use of proceeds table?

Questions relating to prospectus disclosure of corporate CTOs and bankruptcies, penalties, sanctions and personal bankruptcies.

9. Is there a lapsed period of time when disclosure about prior cease trade orders would generally not be considered material to an investor?

10. Would disclosure about any type of offense generally be material to an investor?

11. Is there a lapsed period of time when disclosure about prior offenses would generally not be considered material to an investor?

12. Is there a lapsed period of time when disclosure about prior individual bankruptcies would generally not be considered material to an investor?

Request for Comment

The OSC is seeking comment on its proposed Rule 41-501 and proposed form 41-501F1 until September 23, 1999. The Commission is seeking comment on the impact that OSC Proposed Rule 41-501 and OSC Proposed Form 41-501F1 would have on issuers filing a prospectus if the OSC General Prospectus Proposal is adopted in Ontario only or if it were also adopted in British Columbia as part of new national prospectus requirements. The Commission would encourage interested parties to direct written comments to:

The Secretary
Ontario Securities Commission
20 Queen West
Suite 800, Box 55
Toronto Ontario M5H 3S8

Copies of any submission to the Ontario Securities Commission should also be addressed to the Commission as follows:

Brenda J. Benham
Director
Policy and Legislation
British Columbia Securities Commission
200-865 Hornby Street
Vancouver, British Columbia V6Z 2H4
bbenham@bcsc.bc.ca

Commenters should note that since the Ontario Securities Act requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

DATED at Vancouver, British Columbia, on August 19, 1999.

Douglas M. Hyndman
Chair

Ref: Section 131, Securities Act
Section 169, Securities Act
Form 12A
Form 14A
LPS 3-02