Canada: Less Is More — The CSA Considers Significantly Streamlining Prospectus And Continuous Reporting Disclosure

On April 6, 2017, the Canadian Securities Administrators (the "CSA") released Consultation Paper 51-404 — Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers in which it discusses, and asks for feedback on, potentially sweeping changes to the rules governing prospectus offerings as well as continuous reporting obligations for Canadian reporting issuers other than investment funds.

The changes are being considered in an effort to reduce undue regulatory burdens and costs without compromising investor protections, all in light of shifts in market conditions brought on by changes in investor demographics, technological innovation and globalization.

The CSA has asked for comments on the release by July 7, 2017 and has advised that it is separately considering ways to reduce regulatory burdens in other areas of securities legislation, including reducing disclosure required by investment funds. The changes proposed by the CSA represent meaningful changes to the current disclosure requirements that could result in significant cost savings to issuers when conducting public offerings and complying with continuous disclosure requirements. Given the potential impact that the proposal could have on all participants in the capital markets, Borden Ladner Gervais LLP intends to prepare a response to the various questions posed by the CSA to ensure that the weight of our experience is at the table as these important topics are further considered and refined.

Prospectus Offerings

The CSA proposed a number of potential changes geared towards streamlining public offerings for reporting issuers and is even considering replacing the current system for short-form prospectus offerings.

Alternative Prospectus Model. The most significant change being considered by the CSA is to replace the current system for short-form prospectus offerings with a model more closely linked to an issuer's continuous disclosure. Under the proposed model, the disclosure in a prospectus could be limited to offering specific information, such as:

  • the securities offered,
  • the intended use of proceeds,
  • the plan of distribution,
  • consolidated capitalization and earnings coverage,
  • material risk factors associated with the offering and the offered securities,
  • conflicts of interest, if any, and
  • statutory rights of withdrawal, damages and rescission.

This alternative model has the potential to significantly reduce costs and delays incurred in the capital raising process. This model recognizes the relevance of the continuous disclosure of issuers and the secondary market liability that exists for such disclosure. This model will directly establish the continuum (or provide continuity) between an issuer's continuous disclosure record prepared throughout the year with sporadic capital raising events. If this model is adopted, issuers will need to be vigilant in ensuring that their continuous disclosure is accurate and up to date.

The CSA provided in its report that reporting issuers and dealers participating in an offering would assume liability for any misrepresentation in the reporting issuer's disclosure base and all written marketing communications pertaining to the offering or the securities offered. The CSA will need to clarify what is meant by an issuer's "disclosure base" and carefully identify what obligations underwriters and syndicate members will have regarding such disclosure so that underwriters and syndicate members can determine what documents to review as part of their due diligence.

Streamlining Public Offerings. The CSA has proposed a number of changes that could reduce costs and time for issuers proposing a public offering including:

  • relaxing eligibility criteria to expand the number of issuers that would be short-form eligible,
  • easing certain requirements relating to financial statements, including: (i) requiring two, rather than three, years of financial statements and related MD&A in an IPO prospectus either for all issuers or for issuers that have revenues below a certain threshold, (ii) not requiring interim financial statements to be reviewed by an auditor, and (iii) not requiring pro forma financial information for significant acquisitions, and
  • refining disclosure required in a non-IPO prospectus to (i) eliminate duplicative, or otherwise publicly available, information, and (ii) focus on an overview of the issuer's business as well as similar information to that listed above for the alternative prospectus model.

Other Potential Changes. The CSA also proposed potentially relaxing rules applicable to at-the-market (ATM) offerings such that exemptive relief may no longer be required to conduct an ATM offering. Finally, without providing any details, the CSA stated that it would consider other areas for reducing regulatory burdens associated with capital raising, including cross border offerings and liberalizing the pre-marketing and marketing regime. It is not entirely clear if the reference to cross border offerings captures offerings conducted concurrently in Canada and elsewhere or offerings conducted only outside of Canada which were discussed in OSC Rule 72-503 — Distributions Outside of Canada proposed by the Ontario Securities Commission on June 30, 2016 ( see our prior bulletin discussing such proposal).

Continuous Disclosure

Similar to the changes proposed for prospectus offerings, the CSA proposed changes to both the form and content of continuous disclosure requirements.

Changes to the Form of Disclosure. The CSA is considering a number of changes to the forms used for continuous disclosure including:

  • consolidating the AIF, MD&A and financial statements into a single document,
  • allowing all issuers, not just venture issuers, to prepare a quarterly highlight document rather than MD&A, and
  • permitting issuers to file semi-annual financial reporting rather than quarterly.

Changes to the Content of Disclosure. The CSA is also considering the following changes to the content of continuous disclosure:

  • eliminating a discussion of prior periods and/or the summary of the prior eight quarters in MD&A,
  • removing overlapping disclosure in MD&A already required by IFRS such as financial instruments, critical accounting estimates, changes in accounting policies and contractual obligations,
  • permitting smaller companies (based on a to be determined metric — perhaps revenue, market capitalization or assets — rather than which exchange they are traded on) to comply with reduced disclosure requirements similar to what venture issuers currently are subject to,
  • amending the significance tests that trigger the filing of a Business Acquisition Report (BAR) by:

    • increasing the applicable thresholds,
    • removing one or more of the tests, or
    • creating tests based more on industry specific criteria, and
  • given the widespread use of the Internet and social media, introducing new methods of electronic delivery of disclosure documents.

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