On September 13, 2012, the Canadian Securities Administrators (CSA) published Proposed National Instrument 51-103 – Ongoing Governance and Disclosure Requirements for Venture Issuers and Related Amendments (the Proposals). The Proposals, if enacted, will introduce a new mandatory regulatory regime for venture issuers that is intended to tailor venture issuer disclosure to better reflect investor needs and expectations regarding venture issuers, reduce the length and complexity of the disclosure to make it more manageable for venture issuers and enhance investor confidence in the venture market. The Proposals follow an earlier set of proposals published by the CSA for public comment in July 2011 (the Original Proposals).

The key highlights of the Proposals are as follows:

  • Annual Report: Venture issuers will be required to prepare an annual report that consolidates disclosure regarding their business, management and governance practices and includes audited annual financial statements and associated MD&A and CEO/CFO certifications. The mandatory annual report requirement will be the basis upon which a venture issuer will be eligible to use the short form prospectus system to offer its securities.
  • Quarterly Financial Reporting: The Original Proposals contemplated abolishing the three- and nine-month interim financial reporting requirements. The Proposals retain the requirement to file quarterly interim financial reports but replace the current interim MD&A disclosure with “quarterly highlights,” a short and streamlined discussion of the venture issuer’s operations and liquidity. Venture issuers may continue to provide traditional interim MD&A if they wish, but this disclosure may not be in lieu of the quarterly highlights unless exemptive relief is obtained.
  • Abolition of BARs: The current requirement to file a business acquisition report on a significant acquisition has been removed. It has been replaced in the Proposals with enhanced continuous disclosure reporting, including the requirement to include financial statements for significant acquisitions that reach a 100% market capitalization threshold and disclosure of any material related-entity transactions. The Proposals further eliminate the requirements to provide pro forma statements on major acquisitions unless it is an acquisition that would be the “primary business” of the venture issuer under the long form prospectus rules.
  • Corporate Governance: The Proposals introduce substantive corporate governance requirements relating to conflicts of interest, related-party transactions and insider trading.
  • Audit Committee: Currently the majority of a venture issuer’s audit committee may not be executives or employees of the issuers. This requirement has now been expanded to include control persons of the issuer. Therefore, control persons will only be allowed to sit on an audit committee where a majority of the committee are otherwise independent.
  • Executive Compensation: The Proposals tailor the director and executive compensation disclosure required. Venture issuers will only be required to disclose the compensation of their top three named executive officers as opposed to disclosing the compensation of their top five named executive officers as currently required.
  • Financial Statements: The Proposals reduce the current requirement to include three years of historical financial statements in a long form prospectus to two years of such statements.
  • Prospectus and Technical Report Requirements: The Proposals modify the disclosure made by venture issuers in long form prospectuses and modify the documents that such issuers are able to incorporate by reference in a short form prospectus, a qualifying issuer offering memorandum and a TSXV short form offering document. In addition the Proposals provide that the filing of an annual report will not trigger the filing of a technical report (unless it is separately triggered under the requirements in National Instrument 43-101 – Standards of Disclosure for Mineral Projects, which relates to first-time disclosure of mineral resources, mineral reserves or a preliminary economic assessment or a change to that disclosure which is a material change for the issuer). The filing of a technical report will be triggered by the filing of a short form prospectus.

The Proposals apply to reporting issuers that are not listed or quoted on the main exchange of the TSX, the Alpha Main, a US “national securities exchange” or a foreign marketplace (other than a defined venture market such as AIM); issuers that are subject to Multi-lateral Instrument 51-105 – Issuers quoted in the US Over-the-Counter Markets; or investment funds. Comments on the Proposals must be received by the CSA on or before December 12, 2012. The Proposals may be accessed here.