Canada: CSA Proposals For Venture Issuers – More Suitable And Manageable?

The Canadian Securities Administrators recently issued for comment a package of proposed amendments to existing continuous disclosure, prospectus and audit committee rules and related policies, intended "to make the disclosure requirements for venture issuers more suitable and manageable for issuers at their stage of development." The proposals are open for comment until August 20, 2014.

This represents the CSA's third attempt in recent years to streamline and reduce the rules for venture issuers, after earlier proposals in July 2011 and September 2012 to introduce a new standalone disclosure instrument. Although most respondents to the previous proposals agreed with their underlying objective, others believed all entities participating in Canada's capital markets should provide similar information to investors, regardless of their size or circumstances. Others disagreed on the kinds of concessions that could appropriately be made for venture issuers, or felt that the process of determining how to comply with new disclosure requirements – even if those requirements were ultimately less demanding than their existing practices – would outweigh the benefits. With the new proposals, the CSA hopes to obtain greater consensus by proceeding instead through a series of specific, incremental amendments to existing rules. This would presumably reduce the work for preparers in analyzing the impact of the changes and in realizing their benefits.

Quarterly reporting

The new proposals have discarded the most striking aspect of the previous proposals, to require venture issuers to prepare interim reports just once a year, at the six month point, rather than quarterly. IAS 34 sets out the principles and minimum content for entities preparing interim financial reports under IFRS, but leaves it to regulators in each jurisdiction to prescribe which entities should be required to publish such interim reports, or how often; other jurisdictions commonly only require six-monthly reporting, even for the largest entities. The CSA now proposes a more modest concession in this area, to permit (although not require) venture issuers without significant revenue to fulfil the quarterly reporting requirement by preparing and filing a streamlined disclosure document, referred to as "quarterly highlights", in each of their first three quarters. The quarterly highlights would consist primarily of a short discussion about the venture issuer's operations and liquidity.

This reflects the reality that formal financial statements are often largely irrelevant to monitoring the key risks attaching to an entity at an early stage of its development. In its request for comment, the CSA states: "Venture issuers that have significant revenue would be required to provide existing interim MD&A for interim periods because we think that larger venture issuers should provide more detailed disclosure," and asks for specific input on this point. Some commentators may take the view that this criterion alone (one apparently subject to some subjectivity) should not be the trigger for distinguishing between different disclosure obligations; one can readily think of circumstances in which an entity without significant revenue (but with the promise of great prospects) might hold greater risks for investors than an entity with significant (but stable and predictable) revenue.

Other matters

The CSA also proposes the following, among other things:

• to reduce the instances in which venture issuers must file Business Acquisition Reports (BARs) and to eliminate the requirement that BARs filed by venture issuers must include pro forma financial statements.
• to amend executive compensation disclosure requirements, reducing the number of individuals for whom disclosure is required from a maximum of five to a maximum of three (the CEO, CFO and one additional highest-paid executive officer), reducing the number of years of disclosure from three to two, and eliminating the requirement for venture issuers to calculate and disclose the grant date fair value of stock options and other share-based awards in the summary compensation table.
• to reduce from three to two the number of years of audited financial statements required in an initial public offering (IPO) prospectus for an issuer that will become a venture issuer on completing its IPO.
• to require venture issuers to have an audit committee consisting of at least three members, the majority of whom could not be executive officers, employees or control persons of the issuer. The CSA notes that this would not be a new requirement for TSX Venture Exchange listed issuers, which are already required to meet an almost identical requirement under that exchange's policies.

Overall, the CSA thinks "the tailoring of venture issuer disclosure will enhance informed investor decision making for the venture issuer market by improving the quality of information available to investors while reducing the burden of preparation for venture issuers...The Proposed Amendments will eliminate some disclosure obligations; however, we think that those eliminated obligations may be of less value to venture issuer investors and that the Proposed Amendments will result in more relevant disclosure for those investors. The resulting streamlined disclosure should also make it easier for venture issuer investors to read disclosure documents and locate key information."

The CSA adds that the reduced requirements will "allow venture issuer management more time to focus on the growth of the business." Most readers will likely think that the proposals are too minimal to make a significant difference in this respect, and some may be disappointed that they do not ask investors to step back and consider the true risks of investing in venture issuers to the same degree as the earlier proposals. Still, if only for that reason, it's difficult to envisage the new proposals evoking a majority of opposing views and they will certainly be beneficial in some situations.

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