Canadian securities regulators recently adopted new disclosure rules for earnings guidance and other forward-looking information. The new rules, which are effective for 2008, appear in National Instrument 51-102 and are similar to, but somewhat more onerous than, the former requirements of National Policy 48.
Overview of the New Regime
Key definitions under the new disclosure requirements are as follows:
- “Future-oriented financial information” (FOFI) is information about prospective results of operations, financial position or cash flows presented in the form of a historical balance sheet, income statement or statement of cash flows.
- A “financial outlook” is, like FOFI, prospective in nature, but, unlike FOFI, it is not presented in the form of a historical financial statement. Earnings guidance is an example of a financial outlook.
The rules include a basic prohibition on disclosing any kind of forward-looking information without a reasonable basis, whether it be FOFI, a financial outlook or any other forward-looking information. Oral forward-looking information is not captured by the new disclosure rules, although it may still give rise to civil liability under Ontario securities laws.
The most significant changes under the new rules are that (i) they apply not just to FOFI but also to earnings guidance and other financial outlooks; (ii) FOFI need not be accompanied by an auditor’s report; and (iii) with limited exceptions, the rules govern forward-looking information wherever it is published, including in
- prospectuses, rights offering circulars or offering memoranda (including those of non-reporting issuers);
- continuous disclosure or other regulatory filings; and
- news releases and websites.
Disclosure Requirements for Material Forward-Looking Information
Identification and risk factors. If material forward-looking information is disclosed (including FOFI, a financial outlook or any other material forward-looking information),1 the disclosure must identify the forward-looking information as such and include a caution that actual results may vary from predictions. Material risk factors that are specific to the issuer, and not boilerplate in nature, must be identified.
Factors and assumptions. Issuers must disclose any material factors or assumptions underlying the material forward-looking information.
Policy for updating. If the issuer’s policy for updating material forward-looking information goes beyond the requirements of the rules (see “MD&A Requirements” below), the policy must be explained.
Disclosure Requirements for FOFI and Financial Outlooks
Reasonable assumptions. All FOFI and financial outlooks must be based on assumptions that are reasonable in the circumstances. The information must use the same accounting policies as the financial statements and must be limited to a period that can reasonably be estimated (which the regulators have indicated will not usually extend beyond the issuer’s next fiscal year-end).
Purpose and caution. Issuers must explain the purpose of FOFI and financial outlooks, and caution readers that the information may not be appropriate for other purposes.
Requirements for Management’s Discussion and Analysis
Update for expected material differences. Issuers must disclose in MD&A (or in a news release published beforehand) any events or circumstances that occurred during the period and that are reasonably likely to cause future results to differ materially from any previously disclosed material forward-looking information. The expected differences must be stated.
Compare to actual material differences. Issuers must also disclose in MD&A any material differences between actual results for the period and any previously disclosed FOFI or financial outlook. There is an exception if the FOFI or financial outlook is properly withdrawn (see below) before the end of the period covered by the FOFI or financial outlook.
Withdrawal. Issuers must disclose in MD&A (or in a news release published beforehand) any decision to withdraw material forward-looking information and the events and circumstances that led to the decision, including any assumptions underlying the forward-looking information that are no longer valid.
Protection Against Civil Liability
Ontario’s civil liability regimes give investors the right to sue for misrepresentations in disclosure documents, including continuous disclosure documents, prospectuses and offering memorandums. There is a defence against liability for misrepresentations in forward-looking information if that information is accompanied proximately by cautionary language identifying the material risk factors and disclosing the assumptions underlying the forward-looking information.2 Notably, the conditions for the safe harbour are substantially similar to the disclosure now required for all material forward-looking information under NI 51-102.