Canada: Canadian Securities Regulators Aim To Right-Size Disclosure Obligations For Venture Issuers: Does "Less Mean More"?

Venture issuers will soon be able to take advantage of modified disclosure requirements that are intended to be less onerous and help reduce the cost of compliance for junior public companies. As was announced in April 2015 by the Canadian Securities Administrators (CSA), changes will come into force on June 30, 2015, for certain continuous disclosure and corporate governance obligations of venture issuers — generally defined as public companies not listed on the senior Toronto Stock Exchange.

Given the unique nature of the Canadian capital markets where the majority of public companies in Canada fall within the definition of venture issuer, the amendments stand to have far reaching impact for both issuers and investors in Canada. The general intent of the changes is to improve the quality and relevance of the disclosure for investors by simplifying the requirements and lessening the burden of preparation for management. But does less but more focussed disclosure mean more meaningful information?

The amendments stem from a CSA proposal published in May 2014, which was introduced in response to an unsuccessful effort by the CSA in 2011-2012 to introduce more comprehensive changes which were not met with support from the venture issuer community due to a perception that any benefits of an updated disclosure system would be outweighed by the burden of transitioning to a new and significantly different regime.    

The more modest changes published in April 2015 address such areas as providing venture issuers with the option of replacing full interim MD&A with more abbreviated quarterly highlights, increasing the threshold to trigger significant acquisition (BAR) reporting, and reducing the amount of historical financial statement disclosure in IPO prospectuses, among other things. 

Highlights of the changes to the disclosure and governance requirements of which venture issuers and investors will want to take note are as follows:

Option to prepare Quarterly Highlights rather than full Interim MD&A

One of the key changes is that venture issuers will now be able to choose to satisfy the requirement for interim management's discussion and analysis (MD&A) by instead providing quarterly highlights disclosure. This will consist of a short, focussed discussion of all material information about the issuer's operations, liquidity and capital resources including:

  • financial condition, financial performance and cash flows and any significant factors causing variations to prior periods;
  • known trends, risks or demands;
  • major operating milestones;
  • commitments and events or uncertainties that have materially affected the company or may do so going forward;
  • significant changes from certain prior disclosure; and
  • significant transactions between related parties.

While the option to provide quarterly highlights is available to all venture issuers, investors in larger venture issuers with significant revenue may want full interim MD&A to assist them with making informed decisions. Venture issuers will have to take the needs of their investors into consideration when deciding whether to provide interim MD&A or quarterly highlights. The ability to choose to file quarterly highlights in lieu of full interim MD&A will be available for financial years beginning on or after July 1, 2015.

Increased Threshold for Business Acquisition Report (BAR) Disclosure

The threshold for whether an acquisition is significant will be increased from 40% to 100%. Currently for venture issuers the trigger for requiring the filing of a BAR is 40% based on asset and investment tests set out in the relevant requirements. Starting June 30, 2015, the new significance threshold to trigger a BAR for an acquisition will be 100% (based on the existing tests). The same significance threshold of 100% will also apply to both prospectuses (used to finance proposed acquisitions) and management information circulars (requiring prospectus level disclosure for shareholder approval of proposed acquisitions). This means that issuers that do acquisitions above 40% but below 100% will no longer have to go to the expense of preparing a comprehensive BAR report which also involves preparing financial statements. In addition, as of June 30, 2015, a venture issuer's BAR report will no longer need to include pro forma statements.

Executive Compensation Disclosure Narrowed in Scope

Venture issuers will have the option to use a new Form for executive compensation disclosure which is narrower in scope than the existing Form in the following ways:

  • compensation disclosure will only be required for three individuals rather than five. This will include the CEO, CFO and the next highest paid executive officer whose total compensation exceeds $150,000 annually;
  • two years of compensation disclosure is required to be disclosed (reduced from three years); and
  • the grant date fair value of stock option and other equity based awards will not be required to be disclosed in the summary compensation table but certain other enhanced information regarding share based awards will.

IPO and Subsequent Prospectus Offerings

In keeping with the CSA's goal of streamlining the disclosure obligations for venture issuers, the prospectus requirements will be amended on June 30, 2015 as follows:

  • only two years of audited financials will be required rather than the previous requirement of three years; and
  • the narrative description of the business and operating history has similarly been reduced to disclosure of the past two completed financial years.

Venture issuers will be able to access such reduced disclosure requirements for both an initial public offering (IPO) as well as any subsequent prospectus offering.

Audit Committee Composition

Starting with financial years beginning on or after Jan. 1, 2016, venture issuers will be required to have an audit committee composed of a minimum of three directors, a majority of whom cannot be executive officers, employees or control persons of the issuer or of an affiliate. The requirement is essentially codifying the existing requirement for venture issuers listed on the TSX Venture Exchange (TSXV). Given the move towards more simplified interim disclosure by way of quarterly highlights and the fact that there is no requirement to have auditor involvement in quarterly filings (unlike the U.S.), this requirement may be considered a reasonable balance in improving oversight of quarterly reporting for venture issuers, including those not listed on TSXV. 

Where do we go from here?

In many respects, the CSA amendments not only reflect the Canadian securities regulators' efforts to provide a more suitable and manageable disclosure system for smaller issuers, but may also be seen as the Canadian response to a trend in the United States, where the SEC in recent years has shown a willingness to adapt to a more lenient disclosure and governance regime for emerging growth companies under the JOBS Act.

Will less be more? Only time will tell over the next several quarters in assessing the quality of the disclosure by venture issuers.  If management of venture issuers are able to step up under these "right-sized" more flexible and simplified requirements, to produce shorter but more meaningful and focussed disclosure for investors, then these initial amendments may represent a turning point towards further regulatory changes in our unique Canadian venture market.

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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