2011-08-22 Canadian Securities Administrators Publish Proposals To Revise the Continuous Disclosure Regime for Venture Issuers

On July 29, 2011 the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 51-103 — Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103)

The Canadian Securities Administrators (CSA) recently published for comment a new proposed rule that would significantly revise the ongoing continuous disclosure obligations for venture issuers. The proposed rule, which would be known as National Instrument 51-103 — Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), would replace the current requirements for venture issuers in NI 51-102 — Continuous Disclosure Obligations, NI 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, NI 52-110 — Audit Committees and NI 58-101 — Disclosure of Corporate Governance Practices.

The proposals are open for comment until October 27, 2011. The full text of the proposed rule and related amendments can be found on the OSC website at Proposed National Instrument 51-103.

Key proposed changes from the existing regime are:

  • New definition of "Venture Issuer" — As before, a venture issuer is a reporting issuer, other than an investment fund, that does not have any of its securities listed or quoted on certain marketplaces. However, debt-only issuers, preferred-share only issuers and securitized product issuers are not included in the new definition.
  • Annual report required — The annual report is a new document that is intended to provide a complete annual disclosure record for the venture issuer. It encapsulates many of the previously required disclosures from a venture issuer’s Management’s Discussion and Analysis (MD&A), annual information form and information circular. There is no requirement to include previously mandated disclosures on financial instruments, select annual information, or fourth quarter analysis. As proposed, the annual report will include:
    • Audited annual financial statements;
    • Disclosures on the business, including corporate structure, business description, MD&A, business objectives, off-balance sheet arrangements, significant equity
    • investees, forward-looking information and risk factors;
    • Outstanding securities and trading information;
    • Disclosures over Directors and Executive Officers, including compensation;
    • Disclosures over material related entity transactions and interests of experts;
    • Corporate governance disclosures;
    • CEO and CFO certification of the annual report.

The filing deadline for the annual report will be 120 days after the financial year end, which is consistent with current filing requirements for annual financial statements.

  • Mid-year report required — Venture issuers will have to file a mid-year report. The mid-year period is defined as the period beginning on the first day of the financial year and ending 6 months before the end of the financial year. As proposed, the mid-year report must include:
    • Unaudited interim financial statements for the mid-year period, including comparatives;
    • If the interim financial statements have not been reviewed by the venture issuer’s auditors, a notice stating this fact;
    • MD&A disclosures relating to certain disclosures of the business, off-balance sheet arrangements, significant equity investees and material related party transactions; and
    • CEO and CFO certification of the mid-year report.

The filing deadline for the mid-year report will be 60 days after the mid-year period end, which is consistent with current filing requirements for quarterly interim financial statements.

  • Interim financial statements and MD&A not required for Q1 and Q3 — Under the proposed rules, a venture issuer is not required to file financial statements or MD&A for Q1 or Q3. A venture issuer may voluntarily file Q1 and Q3 financial statements, with or without an MD&A. If a venture issuer voluntarily files quarterly reports, it must do so for at least two years and communicate this choice in the annual report. Voluntary quarterly reports must be filed within 60 days of the period end.
  • CEO and CFO certification not required for Q1 and Q3 — No certification is required for Q1 and Q3, even if voluntary interim financial statements are filed for these periods. However, as noted above, CEO and CFO certification would still be required for annual and mid-year reports.
  • Reports of material change, material related entity transaction or major acquisition — The proposals include this new form that must be filed, along with a news release, within 10 days of any of the following events occurring:
    • A material change;
    • A material related entity transaction;
    • A decision to implement a material related entity transaction, made either by the Board of by senior management where Board approval is probable; or
    • The closing of a major acquisition.

The threshold for a major acquisition is higher than the previous threshold to file a Business Acquisition Report (BAR) under NI 51-102. A major acquisition occurs when the venture issuers acquires a business or related businesses and the value of the consideration is 100% or more of the market capitalization of the venture issuer. There is still a requirement to file financial statements of a business acquired in a major acquisition, but these may be filed within 75 days of the acquisition occurring.

The proposed rules also specify that reports disclosing a material related entity transaction cannot be filed on a confidential basis.

  • Enhanced governance responsibilities — The proposed rules introduce enhanced corporate governance requirements in the following areas:
    • The audit committee must be composed of at least three directors, a majority of whom are not executive officers or employees of the venture issuer or an affiliate.
    • Board of directors must take steps to ensure they are aware of each proposed material related entity transaction, and the consideration to be paid or received.
    • Board of directors must develop policies and processes to avoid conflict of interests.
    • The venture issuer must develop policies and processes to avoid insider trading.
  • Short-form prospectus — All venture issuers would qualify to file a short-form prospectus if they have filed an annual report. Previously, the venture issuer had to voluntarily file an AIF in order to qualify to file a short-form prospectus. Documents that must be incorporated by reference have been updated to reflect the changes to continuous disclosure requirements as noted above.
  • Long-form prospectus — The proposed rules would require only two years of financial statements need be included in a long-form prospectus for venture issuers, compared to three years currently required. Additionally, interim financial statements for the mid-year period, rather than a quarterly interim period, would be required, if applicable. Information on completed or probable major acquisitions must be included in the prospectus and the definition of a major acquisition is consistent with that used in the Report of material change, material related entity transaction or major acquisition form.