On September 13, 2012, the Canadian Securities Administrators (the “CSA”) published for comment a proposed regulatory regime for venture issuers, comprised of proposed National Instrument 51-103 – Ongoing Governance and Disclosure Requirements for Venture Issuers and proposed amendments to various existing rules (the “Proposals”).  The Proposals follow previous proposals published for comment by the CSA on July 29, 2011 (the “Original Proposals”), and a consultation paper published by certain members of the CSA on May 31, 2010.

The Proposals include extensive departures from the current regulatory regime applicable to venture issuers, only some of which are highlighted in this article.

Purpose and Focus of Proposals

Broadly speaking, “venture issuers”, for the purposes of the Proposals, means issuers that trade only on specified junior markets (such as the TSX Venture Exchange or the Canadian National Stock Exchange) and certain unlisted reporting issuers.

The Proposals are intended to customize the governance and disclosure requirements that apply to venture issuers in order to focus on matters of significance to venture issuer investors.  They are designed to eliminate certain disclosure obligations which may be of less relevance to venture issuer investors, and impose additional obligations in areas such as conflicts of interest, related party transactions and insider trading.

The Proposals also consolidate the main governance and continuous disclosure requirements applicable to venture issuers into one new national instrument.  The intention of the Proposals is to permit management of a venture issuer to focus on operational success, by reducing the time spent trying to satisfy regulatory requirements.

Significant Changes since the Original Proposals – Interim Reports

Perhaps the most controversial aspect of the Original Proposals was the proposal that 3-month and 9-month interim financial reports and associated management’s discussion and analysis (“MD&A”) be eliminated.  The Original Proposals would have required venture issuers to file a mid-year report, including MD&A, for the 6-month interim period.  The CSA is now proposing that venture issuers file interim financial reports for each quarterly interim period.  Rather than requiring interim MD&A similar to that required under National Instrument 51-102 – Continuous Disclosure Obligations, the Proposals would require venture issuers to include a short narrative on their operations and liquidity with their interim financial reports.

Highlights – Proposed Continuous Disclosure Regime

Some highlights of the continuous disclosure regime which would be applicable to venture issuers pursuant to the Proposals are as follows:

  • Annual Report – Venture issuers would be required to file an annual report, which would contain disclosure relating to the issuer’s business, management and governance practices, and would include audited annual financial statements (along with associated MD&A) and CEO/CFO certifications.  The annual report would provide venture issuers with access to capital through both prospectus and prospectus-exempt offerings, as described below.
  • Information Circular – Disclosure in a venture issuer’s circular would be streamlined.  Governance disclosure (other than as it relates to compensation) would no longer be part of the circular, and instead would be contained in the annual report.  Executive compensation disclosure for only the top three (rather than top five) named executive officers would be required, and the summary compensation table would cover only the two (rather than three) most recently completed financial years.
  • Interim Reports – Interim financial reports of venture issuers would be accompanied by a short discussion of the venture issuer’s operations and liquidity (referred to in the Proposals as “quarterly highlights”), rather than a full MD&A.  The Proposals would require a CEO/CFO certification on both the interim financial report and the quarterly highlights.
  • Material Change Reporting / Business Acquisition Reports – Venture issuers would be required to file a report in connection with material transactions with related entities.  With respect to significant acquisitions, the current business acquisition report requirements (which are triggered at a 40% significance level) would no longer apply to venture issuers.  Instead, venture issuers would be required to file a report in connection with the acquisition of a business valued at 100% or more of the venture issuer’s market capitalization.  A report in respect of such a major acquisition would generally need to include two years of annual financial statements for the business acquired (with the most recent year being audited), along with unaudited comparative interim financials.  However, no pro forma financial statements would be required (except in certain cases in the context of a long form prospectus offering).    
  • Audit Committees – A venture issuer would be required to have an audit committee composed of at least three directors.  A majority of members of the audit committee of a venture issuer would need to be persons who are not executive officers, employees or control persons of the venture issuer.  This is consistent with the requirements of the TSX Venture Exchange.
  • Corporate Governance Requirements – Venture issuers would be required to develop and implement policies and procedures relating to conflicts of interest, related party transactions and insider trading.  Disclosure relating to these matters, as well as other corporate governance matters, would be included in the annual report.
  • Mailings – The Proposals would permit the use of a notice and access system as an alternative to mailing the annual report and the interim report.  Venture issuers would still be subject to any mailing requirements imposed by applicable corporate law.

Highlights – Proposals relating to Prospectus and Prospectus-Exempt Offerings

Some highlights of the rules which would be applicable to venture issuers in prospectus and prospectus-exempt offerings are as follows:

  • Long Form Prospectus – There would be a new long form prospectus form applicable to venture issuers, which would conform to the disclosure requirements of the annual report.  Venture issuers would generally be required to include two years of audited financial statements in a long form prospectus.
  • Short Form Prospectus – Venture issuers would be eligible to use the annual report (rather than an annual information form) to access the short form regime.  Enhanced disclosure requirements relating to use of proceeds would apply.
  • Qualifying Issuer Offering Memorandum – Venture issuers would be permitted to incorporate by reference their annual report (rather than an annual information form) into an offering memorandum under National Instrument 45-106.

Deadline for Comments

Submissions to the CSA on the Proposals must be made by December 12, 2012.