Canada: CSA Seek Further Comments On Proposed NI 51-103: Changes To Rules For Venture Issuers

On September 13, 2012, the Canadian Securities Administrators (CSA) published a modified proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), for a second comment period. NI 51-103 was originally published for comments in July 2011.

NI 51-103 is a new national instrument that would introduce a new mandatory governance and disclosure regime tailored specifically for venture issuers. A venture issuer is, in general, an issuer whose securities are listed only on specified junior markets such as the TSX Venture Exchange or the Canadian National Stock Exchange. NI 51-103 was proposed by the CSA with the intent of streamlining venture issuer disclosure to address compliance challenges currently faced by venture issuers and to reflect information needs and expectations of venture issuer investors. If proposed NI 51-103 is adopted, venture issuers would no longer be required to comply with National Instrument 51-102 Continuous Disclosure Obligations.

After having received comments from various market participants, the CSA decided to modify certain aspects of the July 2011 proposal. The most significant change relates to financial reporting.

In its initial version, NI 51-103 required financial interim reporting only at mid-year while the CSA has now gone back to the current requirement of filing financial statements on a quarterly basis. However, instead of being accompanied by management's discussion and analysis as is currently required, these interim financial statements would be filed with a short discussion of the venture issuer's operations and liquidity, referred to as "quarterly highlights."

Below are a summary of the proposed changes to the current governance and disclosure regime for venture issuers and a summary of the main changes from the original NI 51-103.

Summary of Proposed Changes to Current Regime

Continuous Disclosure

NI 51-103 would introduce consolidated disclosure of the venture issuer's business, management, governance practices, audited annual financial statements, management's discussions and analysis (MD&A) and CEO and CFO certifications in a single document, to be known as an "annual report." The annual report would have to be filed on or before the 120th day after the end of a venture issuer's financial year.

In addition, interim MD&A requirements would be replaced with a requirement for a short discussion on a venture issuer's operations and liquidity (i.e., quarterly highlights) to be filed concurrently with the interim financial reports.

Both the annual report and interim report would constitute "core documents" for purposes of secondary market liability.

Prospectus Offerings

New content requirements for a long form prospectus of venture issuers would be introduced to conform to the disclosure required in an annual report under NI 51-103. Also, only two years of audited financial statements would need to be included in the long form prospectus of a venture issuer, instead of current requirement of three years of audited financial statements.

Mining Technical Report

Under current securities legislation, a venture issuer must file an AIF to be eligible to use a short form prospectus (except in limited circumstances). The filing of an AIF then triggers the preparation and filing of a technical report under National Instrument 43-101 Standards of Disclosure for Mineral Projects for mining issuers. As a result, mining venture issuers typically only file an AIF if they want to carry out a financing by way of a short form prospectus or under a prospectus exemption that requires the filing of an AIF. However, under changes to the rules governing short form prospectus offerings that will accompany the adoption of NI 51-103, all venture issuers that have filed an annual report will be eligible to use the short form prospectus offering system.

In order to maintain the status quo and avoid adding a requirement for mining venture issuers to file a technical report upon filing of an annual report, the CSA are proposing that, for a venture issuer, a mining technical report be required only in the following circumstances: (i) the venture issuer files a short form prospectus; or (ii) the venture issuer's annual report contains disclosure of the type that would trigger a technical report (a first-time disclosure of mineral resources, or mineral reserves or a preliminary economic assessment or a change to that disclosure, if that change constitutes a material change for the venture issuer). However, the short form prospectus trigger would only be applicable if the venture issuer had not, in the 12 months preceding the date of the preliminary short form prospectus, filed a technical report or relied on an exemption from filing a technical report.

Main Changes From the Original Proposed 51-103

Mid-Year Reports

Originally, the CSA proposed to eliminate the required filing of interim financial reports and MD&A for the 3 and 9 month interim periods. Instead, a mid-year report, including MD&A, was proposed and issuers would have had the option of voluntarily filing interim financial reports and MD&A for the 3 and 9 month interim periods. Based on the comments received, the CSA are now proposing to require interim financial reports for each of the 3, 6 and 9 month periods although quarterly highlights instead of MD&A would be required with a certificate from the chief executive officer and chief financial officer certifying that there are no misrepresentations in the filed documents. It should nonetheless be noted that venture issuers would still have the option to file more traditional MD&A if they wish to do so.

Major Acquisitions

The introduction of NI 51-103 would eliminate the requirement for venture issuers to file a business acquisition report upon the completion of significant acquisition. Instead, venture issuers would be required to file a material change report with enhanced disclosure. In the new proposed NI 51-103, the test for determining when an acquisition is a major acquisition has been modified so that both the venture issuer's market capitalization and the estimated value of the business to be acquired are determined prior to the announcement of the transaction, thereby eliminating the need to provide for an optional significance test at the time of closing of the transaction.

In addition, venture issuers would not be required to prepare pro forma financial statements following a major acquisition except for disclosure to be provided in a long form prospectus if the business acquired is also a primary business.

Audit Committees

In response to the feedback received, the CSA have enhanced the requirements for impartiality by venture issuer audit committees. It was previously proposed that a majority of the members of the audit committee must not be executive officers or employees of the venture issuer while it is now proposed to add control persons of the venture issuer or its affiliates to this list.

Executive Compensation Disclosure

The CSA are now proposing to require executive compensation disclosure only in the venture issuer's information circular instead of repeating the information in both the information circular and annual report, as was previously proposed. The new proposed NI 51-103 also contemplates that executive compensation disclosure will be required for only the top three, rather than top five, named executive officers of a venture issuer.

Corporate Governance

The new proposed NI 51-103 would require the board of directors of a venture issuer to develop and implement policies and procedures to ensure that each director is made aware of and has an opportunity to consider, discuss and address in a timely fashion conflicts of interest between the venture issuer and any of its directors or executive officers and proposed related party transactions and the consideration to be paid or received by the venture issuer. Venture issuers will have the discretion to design and implement these policies and procedures.

NI 51-103 also requires venture issuers to develop and implement insider trading and disclosure policies.

Next Steps

The comment period on the new proposed NI 51-103 is open until December 12, 2012 and the CSA have invited market participants, including issuers, investors, legal counsel and promoters, to provide input on the proposed new regulatory regime for venture issuers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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