Exemption. In certain circumstances, the auditor’s report
has been qualified or not prepared in the specified form.
Issuers, except for investment funds, must include financial
statements in the OM that comply with National Instrument
52-107 – Acceptable Accounting Principles and Auditing
Standards (NI 52-107). The Notice discusses the financial
statement requirements for investment funds which is outside
the scope of this article.
17. Inappropriately using a Notice to Reader – The CSA
stated in the Notice that issuers cannot attach a cautionary
disclaimer in the form of a Notice to Reader to their interim
financial reports (e.g., “Readers are cautioned that these
financial statements may not be appropriate for their
purposes.”) Issuers must obtain the requisite expertise from
external advisors if they do not have the expertise themselves
to prepare financial statements as required under the form
requirements. See also #18 and #19 below.
18. Failing to prepare financial statements in accordance
with appropriate accounting principles and improperly
certifying the OM – The CSA noted that many of the OMs
reviewed reflected a variety of inappropriate accounting
principles. Financial statement disclosure must comply with
NI 52-107. This is a very important requirement. Certifying
signatories of an OM should review a complete OM, including
required financial statements, before signing an OM. All items
in the OM, including the required financial statements must
be placed before the certificate page to ensure it is properly
certified. Generally, issuers must prepare the financial
statements in accordance with Canadian GAAP applicable
to publicly accountable enterprises and not Canadian GAAP
applicable to private enterprises. Canadian GAAP applicable
to publicly accountable enterprises other than investment
funds has transitioned to IFRS for fiscal years beginning on or
after January 1, 2011. Issuers must prepare all of their interim
financial reports and annual financial statements included in
an OM for fiscal years beginning on of after January 1, 2011
in accordance with IFRS.
19. Improperly certifying the OM – The CSA noted problems
with signatures and some issuers who are not including or
attaching financial statements before signing and dating the
Consequences of failing to Comply with the OM requirements
under the OM Exemption
The Notice outlined the consequences of failing to comply
with the applicable OM disclosure requirements, which vary in
degree of severity from:
(a) Requiring the issuer to file a revised or amended OM;
(b) Same as (a) and the revised OM must also be delivered to
(c) Same as (b) and the issuer must grant rescission rights to
(d) Imposing a cease trade order (CTO) requiring the issuer
to address (a), (b) or (c) before the CTO is revoked. For example,
a recent review of the Alberta Securities web site indicates that
the ASC has issued almost a dozen CTOs relating to deficient
OMs since 2011.
(e) Irrespective of (a), (b), (c) or (d), take enforcement action.
The bottom line is that issuers must take their disclosure
obligations seriously under the OM Exemption or they may face
regulatory consequences. This is especially important since the
OM Exemption is based on protecting investors from a public
policy perspective based on, among other things, providing
potential investors with a prescribed form of offering document
to ensure investors can make a fully informed decision. Arguably,
a failure to satisfy the form requirements and thus providing
materially deficient disclosure to purchasers violates the OM
Exemption and is an illegal trade.
The above article only summarizes some of the guidance
provided by the CSA in the Notice and readers are urged to read
the Notice in its entirety which is publicly available on the websites
of the Canadian securities regulatory authorities.
Who can help Issuers with OM Disclosure?
Issuers, especially smaller issuers, may be hesitant to engage
lawyers who have specialized experience in securities law and
they may choose to prepare OMs ‘in-house’ for cost reasons.
Although the ‘cost of funds’ is always an important consideration,
issuers should be mindful that completing the Forms is not just a
perfunctory exercise, but one that needs the requisite expertise of
someone who is familiar with the Form disclosure requirements
and who can effectively work with management to obtain the
necessary information. The retention of skilled professionals will
reduce the likelihood that issuers will inadequately comply with the
Form requirements which could incur regulatory sanctions which
could significantly add to costs and draw negative attention to the
issuer. For these and other reasons professional legal advice on
your OM is highly recommended.
Pre-Filings of OMs – Help from Certain CSA Members
So what if you want to obtain additional comfort, whether you
use a lawyer or not, on whether your OM is compliant?
Two CSA members allow issuers to pre-file OMs to confirm
whether the OM is in compliance with applicable securities law -
the SFSC and the New Brunswick Securities Commission (NBSC).
(a) Saskatchewan Financial Securities Commission
In Saskatchewan, issuers may pre-file a draft OM on a
voluntary basis for staff review and comment before it is used.
Staff Notice 45-706 Voluntary Pre-Offering Review of Offering
Memorandums Under NI 45-106 Prospectus and Registration
Exemptions sets out the details. The SFSC notes that the primary 5