The increase in initial public offering (IPO) activity in 2017 saw an increase in the use of "growth targets" – forward-looking information about a company's medium- to long-term financial and operating results – to supplement the company's growth strategy disclosure. The quality of a company's growth strategy and management's track record for achieving growth can significantly impact the success of an IPO as well as ongoing share price performance. Institutional investors are demanding more information and a greater level of detail from companies with respect to their growth plans, especially in the case of new public companies. The use of growth targets can be helpful because they quantify the impact of growth plans from management's perspective, providing greater visibility into the company's performance in the future.
Historical approach to growth strategy disclosure
Growth strategies are the actions a company intends to take in order to grow revenues, earnings or other results. Until as recently as 2015, the practice in Canada has been to describe growth strategies only in general terms, without quantifying the potential impact of these strategies on the company's future financial or operating results. This historical approach has its limitations, as it leaves investors and research analysts to determine how a company's growth plans may translate into actual performance in the future without the benefit of management's own views. It may also lead to over-reliance on the company's historical growth rates as a predictor of future results. Historical growth rates may be either lower or higher than anticipated growth rates and may not account for changes to the company's business, such as the implementation of new initiatives and strategies. The use of growth targets to supplement a company's growth strategy disclosure seeks to address these issues, although investors and research analysts still need to apply their own analysis and judgment in evaluating the extent to which a company will achieve its growth objectives.
Growth targets are not the same as guidance
Growth targets, unlike more traditional earnings guidance, are medium- to long-term in nature (typically three, five or seven years in the future), and represent results that a company intends to achieve by a certain time in the future based on its current business plan and strategies. Growth targets are not intended to be a forecast of future results. Growth targets may be provided for different financial measures and operating metrics, such as revenue, sales, net income, EBITDA, adjusted EBITDA, margins, capital expenditures, store openings, same store sales growth, and even compound annual growth rates for revenue or earnings measures.
Growth targets should not be presented as a year-by-year forecast or year-by-year guidance for the period of time covered by the targets.
Whereas guidance is usually expressed as an estimated range of values for a particular financial reporting period (e.g., "guidance for fiscal 2018 revenue is in the range of $525 to $550 million"), disclosure with respect to growth targets tends to be looser (e.g., "we believe an opportunity exists to grow our annual revenue to between $525 and $550 million by 2022"). In order to avoid regulatory concerns, growth targets must have a reasonable basis and be based on reasonable assumptions. While they can be aspirational, management and the board of the company must believe they are realistically achievable.
Legal and regulatory considerations relating to growth targets
Growth targets are a form of forward-looking information under Canadian securities laws, and are subject to the same legal and regulatory requirements that apply to all forms of forward-looking information. When using growth targets, the following should be considered:
Format
In Canada, growth targets are usually discussed in the
"Outlook" section of the company's management's
discussion and analysis (MD&A) or in the growth strategies
section of the IPO prospectus, or both. Growth targets are often
also summarized in table format in the prospectus cover page
artwork and in the roadshow presentation for the IPO. In the United
States, growth targets may be provided in the roadshow presentation
but not in the registration statement or prospectus itself. The
disclosure of growth targets is accompanied by the usual and
prescribed disclaimers and cautionary statements for
forward-looking information.
Length of target period
The early Canadian examples of growth target disclosure from 2015
used a five- to seven-year period for the company to achieve its
target results. However, due to regulatory concerns that targets
must be limited to a period for which the information can be
reasonably estimated, target periods on recent IPOs have been
shorter – typically between three and five years. The Ontario
Securities Commission (OSC) has indicated that it may raise
comments in respect of the reasonableness of the length of the
target period. Accordingly, a company should be prepared to
demonstrate that sufficient visibility and predictability exists in
its business and industry to warrant using a target period that
extends beyond the end of its next fiscal year.
Targets should not be presented as a year-by-year
forecast
Growth targets are not intended to be, and should not be presented
as, a year-by-year forecast or year-by-year guidance for the period
of time covered by the targets. For instance, if a company's
goal is to achieve revenue of between $525 and $550 million by
2022, it should not disclose its anticipated revenue in each of
2018, 2019, 2020, 2021 and 2022. The intention is to provide
management with adequate "runway" to meet its targets
within the specified timeframe using the various elements of the
company's growth strategy. Growth may not be linear, and may be
higher in some years as compared to other years within the target
period. If appropriate, issuers should disclose the reasons for
anticipated year-to-year variations and the drivers of growth.
Assumptions underlying growth targets must be stated in
detail
Securities regulators in Canada have a preference for numerous and
detailed assumptions underlying growth targets. This should include
a mix of qualitative descriptions of assumptions and material
factors relevant to the targets (including risk factors) and, where
appropriate, details as to actual amounts assumed (e.g.,
assumptions with respect to number of stores to be opened each
year, capital expenditures required to achieve the intended growth,
foreign exchange rates, etc.). The OSC has indicated that it may
ask a company to limit growth targets to a shorter period (for
example, one or two years) if the company is unable to sufficiently
support its growth targets with reasonable qualitative and
quantitative assumptions.
Assumptions underlying growth targets must be
reasonable
Securities regulators in Canada have shown a willingness to
challenge the reasonableness of assumptions underlying growth
targets, particularly in circumstances where the targets and
anticipated future growth rates are not supported by the
company's historical results and growth rates. Having
reasonable assumptions is also important in terms of mitigating
potential liability for misrepresentation relating to growth target
disclosure. During the comment process, companies must be prepared
to explain to the regulator the key drivers of anticipated growth
and why the company's growth targets are reasonable. In doing
so, companies must refer to the details of their specific business
plans and objectives. As part of the comment clearing process, the
regulator may require additional disclosure regarding assumptions
to be added to the prospectus.
Growth targets are subject to updating obligations
post-IPO
Canadian legal requirements relating to forward-looking information
require companies, during the period covered by the growth targets,
to discuss in their MD&A or in a news release events and
circumstances that are reasonably likely to cause actual results to
differ materially from previously disclosed growth targets. The
expected differences must also be disclosed. Companies must also
discuss in their MD&A material differences between actual
results achieved as compared with previously disclosed growth
targets. Since 2015, practice has been mixed in terms of companies
providing regular updates with respect to progress towards growth
targets in the absence of a change in outlook or circumstances that
would lead management to conclude that a company will not be able
to achieve its target results. While we believe it is reasonable to
take the view that no update should be required if a company
remains on track to achieve its growth targets by the end of the
target period, this view may not be shared by securities regulators
in Canada. As part of the comment clearing process for an IPO
prospectus, a regulator may require a company to commit to
providing updates of progress towards growth targets in its annual
MD&A for each financial year in the target period. This would
include a discussion of growth targets disclosed in the IPO
prospectus, the company's actual results and a discussion of
variances from the targets.
Liability for growth target disclosure
In Canada, growth targets are part of a company's prospectus
disclosure, and therefore any statutory liability for
misrepresentation would apply equally to growth targets as well as
other information in the prospectus. Moreover, the liability safe
harbour under Canadian laws that normally applies to guidance and
other forward-looking information issued by public companies does
not apply to forward-looking information contained in an IPO
prospectus. This does not necessarily mean that a company's
failure to achieve growth targets by the end of the target period
would constitute a misrepresentation. This could be the case if the
assumptions underlying the growth targets were found to be
unreasonable. Nevertheless, companies must weigh the benefits of
providing growth target disclosure against the potential risks. For
a Canadian company undertaking a cross-border IPO (involving a
public offering in Canada and the United States), the practice is
not to include any growth target disclosure in the prospectus or
roadshow materials due to liability concerns.
Growth targets are a useful supplement to a company's growth strategy disclosure, since they help quantify the impact of growth plans from management's perspective. Although growth targets are being more closely scrutinized by investors and more closely reviewed by securities regulators in Canada, companies looking to go public should continue to consider their benefits.
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