The Canadian Securities Administrators (CSA) have published for comment a revised proposal for a new regulatory regime for venture issuers under Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103). Under NI 51-103, originally proposed in July of 2011, the CSA hope to usher in a tailored regime for venture issuers. As discussed in a post earlier this month, the highlights of the proposal include a new “annual report” to replace in large part the continuous disclosure that is currently required, as well as the elimination of business acquisition reports (or BARs).

Objectives of NI 51-103

In proposing this regime for venture issuers the CSA has four objectives: (i) to improve access to key information and facilitate informed decision-making by venture issuer investors; (ii) to allow venture issuer management more time to focus on the growth of their company’s business by reducing the time venture issuer management have to spend reading and trying to understand disclosure requirements; (iii) to enhance investor confidence in the venture market by introducing substantive governance standards relating to conflicts of interest, related party transactions and insider trading; and (iv) to enhance the ability of securities regulators to focus on the unique challenges associated with the venture market when considering rule-making.

The CSA received 69 comment letters in response to the original proposal. The most significant revisions in the new proposal relate to continuous disclosure and governance.

Continuous Disclosure

The CSA’s revised proposal does include significant changes regarding continuous disclosure requirements, particularly with respect to interim reporting. The new proposal no longer contemplates the requirement for venture issuers to file only a mid-year report; instead interim reports would continue to be required for the three, six, and nine month interim periods, to be filed within 60 days after the end of such interim period. These interim reports would contain interim financial reports and quarterly highlights with a short discussion of the venture issuer’s operations and liquidity. Each interim report would be required to include a certificate from the CEO and CFO stating that there were no misrepresentations in the report or quarterly highlights. Providing management’s discussion and analysis (MD&A) similar to that required under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) would be optional for venture issuers in the interim reports. Although issuers would have the option of providing MD&A in addition to the required filings under NI 51-103 for the interim periods, those issuers who want to file NI 51-102 documents in lieu of the documents that would be required under NI 51-103 would have to apply for exemptive relief.

The revised proposal still consolidates most of a venture issuer’s disclosure requirements into a single document called the “annual report.” The annual report would contain disclosure about the venture issuer’s business, management, governance practices, audited financial statements, the auditor’s report, and MD&A. Similar to the proposed interim reports, the CEO and CFO of the issuer would also be required to certify and date the annual report. In keeping with the original proposal, this annual report would need to be filed within 120 days of the issuer’s financial year-end.

In addition to making changes to the actual disclosure requirements for venture issuers, the revised proposal also contemplates a significant change in the delivery of those disclosure documents. Under NI 51-103, disclosure documents would only need to be delivered upon request, instead of the previous requirement of mandatory mailings. This proposed delivery option would require the venture issuer to issue a new release that discloses the filing of each annual and interim report within three business days of that filing. The news release would have to (i) provide the address of the SEDAR website and the address or a link to another webpage where the particular report could be viewed electronically; (ii) that a registered holder or beneficial owner of securities can receive a copy of the most recently filed report on request, free of charge; and (iii) disclose the contact information necessary for the registered holder or beneficial owner to make the request. If a request is made by a registered securityholder or beneficial owner, the venture issuer would have to send the most recently filed report to that person, without charge within three business days of the request. A paper copy of the report could be sent by pre-paid mail, courier, or the equivalent, or by any other method that the requestor consents to. This proposed “notice and access” method of delivery is meant to conform to the delivery requirements of NI 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer and to reduce additional costs to venture issuers.

Executive Compensation Disclosure

In the original proposal it was contemplated that executive compensation disclosure would be included in the annual report. Under the new proposal such compensation disclosure would be included in the information circular, which is intended to make executive compensation information more easily accessible to securityholders when they are voting. Also, this compensation disclosure would only be required for the top three named executive officers rather than the originally suggested top five named executives. 

Major Acquisition Disclosure

Under the original proposal, an optional significance test was to be introduced to allow significance to be calculated using market capitalization on the acquisition date rather than the announcement date for significant transactions. This optional significance test has been eliminated in the revised proposal and has been replaced with a “major acquisition test” that considers both the venture issuer’s market capitalization and the estimated value of the business to be acquired prior to the announcement of the transaction. If the value of the consideration for the business is 100% or more of the market capitalization of the venture issuer then the transaction will be considered to be a major acquisition for the purposes of the proposed regime.

As was suggested in the original proposal, major acquisitions would not require business acquisition reports, but would instead require disclosure reporting that includes disclosure of material related entity transactions and the requirement of financial statements for such business acquisitions. The disclosure required for major acquisitions would include a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for the two most recently completed financial years, if the venture issuer has completed two financial years. It is important to note that only the financial information for the year most recently completed before the acquisition would have to be audited. Additionally, unlike in the original proposals, pro forma financial statements would not be required for major acquisitions unless, in the context of a long form prospectus, the major acquisition is also a primary business.

Audit Committee Composition

In the original proposal, the board of directors of a venture issuer would have been required to appoint an audit committee composed of minimum of three directors, a majority of whom were not executive officers or employees of the issuer or its affiliates. Under the revised proposal, control persons have been added to this list of persons that are not considered independent for this purpose. This change is consistent with the requirements of the TSX Venture Exchange and was made based on the CSA’s belief that control persons of venture issuers often have significant control over management.

Corporate Governance Guidelines

Under NI 51-103, venture issuers would be required to develop and implement of specific policies and procedures aimed at addressing substantive corporate governance issues. These include policies and procedures relating to conflicts of interest and related party transactions as well as insider trading.

Prospectus and Exempt Offerings

A new form of long form prospectus is proposed that would better conform to the disclosure in the proposed NI 51-103 venture issuer annual report. This new form of prospectus for venture issuers requires two years of audited financial statements instead of three years. For venture issuers wishing to use a short form prospectus, the revised proposal contemplates significantly enhanced disclosure requirements concerning the use of proceeds. This enhanced disclosure is not currently required with short form prospectuses, but the CSA believe that this is necessary for venture issuers. In general, the proposed disclosure rules would require venture issuers to state the estimated net proceeds or the minimum amount of net proceeds, depending on the circumstances of the issuance. It would also be necessary for the issuer to disclose the total funds available, accompanied by a breakdown of those funds in prescribed categories, and the principal purposes for which the issuer plans to use the available funds.

Under the proposed regime, all venture issuers would be required to file an annual report and would be eligible to file a short form prospectus (in contrast with non-venture issuers who are required to have a “current AIF” in order to be eligible).

Mining Issuers

In order to align the venture issuer trigger for filing a technical report with those of non-venture issuers, the requirement to file a technical report for a venture issuer would be triggered upon the filing of a short form prospectus or if the venture issuer’s annual report contains disclosure relating to the first time disclosure of mineral resources, mineral reserves or a preliminary economic assessment or a change to that disclosure if such change constitutes a material change for the venture issuer.

The revised proposal is open for comment until December 12, 2012.