CSA Implements Changes to Disclosure and Governance Obligations for Venture Issuers
The Canadian Securities Administrators will be implementing amendments to current disclosure and governance obligations for venture issues substantially in line with their last published proposals in 2014. These amendments are intended to streamline and tailor disclosure requirements and to enhance the substantive governance requirements for venture issuers. The new rules for venture issuers include:
- allowing the requirement for management's discussion and analysis (MD&A) for interim financial periods to be satisfied by a streamlined and focused report on quarterly highlights;
- implementing a new tailored form of executive compensation disclosure;
- reduce the instances in which a business acquisition report (BAR) and similar disclosure must be filed (including changes to significance thresholds);
- requiring audit committees to have a majority of independent members; and
- amending the prospectus disclosure requirements to reduce the number of years of audited financial statements required for venture issuers becoming reporting issuers and to conform the disclosure requirements with the changes related to continuous disclosure.
The CSA indicates that the new rules are designed to focus disclosure of venture issuers on information that reflects the needs and expectations of venture issuer investors, while eliminating disclosure obligations that may be less valuable.
In addition, the CSA is implementing the following amendments applicable to all issuers:
- updating the annual information form disclosure for mining issuers to conform such disclosure to 2011 amendments made to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101); and
- establishing executive compensation disclosure filing deadlines.
The new rules follow from the CSA's earlier proposal in 2011/12 to implement a new regulatory regime for venture issuers, which would have included separate continuous disclosure and corporate governance obligations for venture issuers. While the CSA determined in 2013 not to pursue the implementation of a new venture issuer regime, the new rules retain some elements of the earlier proposal.
Amendments Exclusive to Venture Issuers
Venture issuers will be permitted to prepare and file a streamlined quarterly disclosure document, referred to as "quarterly highlights", in the place of quarterly interim MD&A, for the first three quarters of an issuer's fiscal year.
Quarterly highlights would consist of a short discussion regarding the issuer's operations and liquidity including known trends, demands, major operating statistics and changes thereto, commitments, events, expected or unexpected, or uncertainties that have materially affected operations and liquidity in the quarter or are reasonably likely to have a material effect going forward.
Business Acquisition Reports
Currently all issuers are required to file a BAR within 75 days of a significant acquisition, including audited financial statements of the acquired business for the most recent financial year and pro forma financial statements of the issuer.
The new rules increase the significance threshold for venture issuers by raising each of the asset test and investment test thresholds from 40% of the consolidated assets of the venture issuer (calculated using the most recent interim or annual financial statements of the venture issuer) to 100%, thereby reducing the instances where BARs are required. This same threshold applies for inclusion of BAR-like disclosure for proposed acquisitions in both prospectuses and information circulars.
The new rules also eliminate the requirement that BARs filed by venture issuers must include pro forma financial statements.
Executive Compensation Disclosure
The new rules would allow venture issuers to comply with either the existing executive compensation disclosure requirements under Form 51-102F6 – Statement of Executive Compensation, or a new executive compensation form specific to venture issuers (Form 51-102F6V) that would have the effect of streamlining disclosure to a certain extent as follows:
- a venture issuer specific definition of 'Named Executive Officer' that would include the Chief Executive Officer and Chief Financial Officer during any part of the most recently completed financial year, and only one other executive officer whose total compensation was more than $150,000 (reduced from three other executive officers under the current requirements) at the end of the most recently completed financial year;
- two years of disclosure (reduced from three years); and
- eliminating disclosure of the fair market value of stock (options) and other share-based awards, and replacing it with detailed disclosure about the issuance and exercise of such securities.
The new rules will implement new thresholds for the disclosure of perquisites, being (i) $15,000 or greater if the individual's salary is less than $150,000, (ii) 10% of salary if the salary is between $150,000 and $500,000, and (iii) $50,000 if the salary is greater than $500,000.
Audit Committee Composition
Previously, venture issuers were exempt from composition requirements for their audit committees. The new rules require venture issuers to have an audit committee consisting of a minimum of three members, the majority of whom are independent (i.e. having members other than executive officers, employees or control persons of the venture issuer or of an affiliate of the venture issuer). This would be generally consistent with existing requirements under the TSX Venture Exchange.
Exceptions will also be included in the new rules from the composition requirements for certain events, such as death, disability or resignation.
The new disclosure requirements have been conformed within the prospectus requirements for venture issuers as follows:
- permitting the use of quarterly highlights instead of existing interim MD&A;
- permitting compliance with executive compensation disclosure requirements using Form 51-102F6V in a prospectus; and
- BAR-level disclosure required in a prospectus only where the acquisition is significant at the 100% level.
For issuers conducting an initial public offering (IPO) who will be a venture issuer upon completion of the IPO, two years (instead of three years) of audited financial statements will be required in the IPO prospectus.
The new rules also reduce the requirement to describe a venture issuer's business and its history from three to two years.
Amendments Applicable to All Issuers
Executive Compensation Disclosure Deadline
The new rules also establish a fixed deadline for filing executive compensation disclosure, set at 140 days after their most recently completed year end for non-venture issuers and 180 days after their most recently completed year end for venture issuers.
Importantly, for those issuers whose applicable corporate law and constating documents permit their annual meeting of shareholders to be held later than such deadline, this could result in an issuer having to file its executive compensation disclosure twice: once in stand-alone form to meet the foregoing deadline and again within its management information circular filed in connection with its annual meeting of shareholders.
Mining Issuer Disclosure
The new rules include revisions to annual information form disclosure to conform to changes made to NI 43-101 in 2011.
The majority of the new rules implemented above take effect on June 30, 2015, other than the three following items:
- The option to provide quarterly highlights instead of MD&A will apply in respect of financial years beginning on or after July 1, 2015.
- The audit committee composition requirements will apply in respect of financial years beginning on or after January 1, 2016.
- The new deadlines for providing executive compensation disclosure for both venture and non-venture issuers will apply in respect of financial years beginning on or after July 1, 2015.