The Canadian Securities Administrators (CSA) has published guidance regarding reporting issuers that distribute numerous securities to acquire assets or businesses that appear to possess little or no actual value or operating history and pay notably inflated prices.
In such cases, regulatory concerns may arise with the asset or business acquisitions, which mostly involve venture markets, including misleading disclosures potentially amounting to market manipulation, according to the CSA’s news release.
CSA Staff Notice 51-366 – “Regulatory Concerns with Certain Asset or Business Acquisitions” – discusses such regulatory concerns. It also identifies the applicable requirements for issuers but does not add new requirements.
According to the staff notice, for reporting issuers that issue a significant number of securities, such securities may feature no resale restrictions or a short hold period to acquire an asset or business with little or no actual value or operating history.
The staff notice noted that the reporting issuers may have acquired this asset or business at a seemingly significantly inflated price, then would later provide continuous disclosure calling into question whether the value is reasonable and stating that the business or asset acquired:
- has a minimal carrying value
- is at a very early stage of development
- was recently obtained by a seller from a third party, with the seller not making any significant expenses to develop the asset or promote the business before selling it to the reporting issuer
Regulatory concerns
According to the CSA’s news release, possible regulatory concerns include:
- misleading disclosures or misrepresentations in a reporting issuer’s continuous disclosure record
- no reasonable basis for the valuation of the asset or business to be acquired
- false or unbalanced promotional campaigns in support of the acquisition
- unreasonable or unsupportable assumptions for an issuer’s recording of all or a substantial part of the consideration transferred as intangible assets or goodwill, with the value of such intangible assets or goodwill substantially impaired shortly following the acquisition
The staff notice explained that the potentially misleading disclosures or misrepresentations could result in:
- information asymmetry since the investors would buy the securities at a possibly inflated price without seeing a proper disclosure about the acquisition’s value
- the resale of numerous securities in the secondary market before public disclosure of the information regarding the actual value of the asset or business
In its news release, the CSA said its staff would keep applying heightened regulatory scrutiny to reporting issuers connected to acquisitions appearing to raise such regulatory concerns.
As the council of the securities regulators across Canada’s provinces and territories, the CSA seeks to coordinate and harmonize regulations concerning the country’s capital markets.