New rules largely consistent with other jurisdictions
In Canada, disclosure of forward-looking information (FLI) (including disclosure of future-oriented financial information (FOFI) and financial outlooks) has been governed by the somewhat outdated and imprecise National Policy 48 (NP 48). Effective December 31, 2007, all members of the Canadian Securities Administrators (CSA) will be revoking NP 48 and replacing it with harmonized national rules in the form of amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102).
These amendments to NI 51-102 will apply to all disclosure of FLI and will primarily govern disclosure of FLI by entities that are “reporting issuers” in a Canadian jurisdiction. Notably, however, disclosure of FLI contained in prospectuses, rights offering circulars and offering memoranda issued by nonreporting issuers will also be subject to these requirements. While many nonreporting issuers may not previously have been subject to NP 48, there has long been some confusion about its application and breadth. The clear and concise requirements of the proposed amendments are therefore a welcome development, particularly as they largely reflect similar disclosure requirements in other jurisdictions.
Under NI 51-102, disclosure of FLI will have to comply with each of the following elements:
- FLI must not be disclosed unless the issuer has a “reasonable basis” for the FLI;
- FLI must be identified as such;
- Users must be cautioned that actual results may vary from the FLI and material risk factors that could cause actual results to differ materially from the FLI must be identified;
- The material factors or assumptions used to develop the FLI must be stated; and
- The issuer must describe its policy for updating FLI if it includes procedures in addition to those described in the section of NI 51-102 dealing with updates to FLI required in a Management's Discussion and Analysis (MD&A) supplement.
FOFI and financial outlooks comprise a subset of FLI and, along with the requirements set out above, will be subject to the following additional requirements:
- In preparing FOFI, assumptions used must be “reasonable and appropriate in the circumstances”;
- The period covered by the FOFI or financial outlook must be limited to a period for which the information in the FOFI or financial outlook can be reasonably estimated;
- Accounting policies used should be those the issuer expects to use to prepare its historical financial statements for the period covered by the FOFI or the financial outlook;
- Disclosure of FOFI or a financial outlook must state the date it was approved by management, explain the purpose of it and caution to readers that the information may not be appropriate for other purposes.
The application of the proposed amendments to prospectuses and rights offering circulars is national in scope. As the contents of offering memoranda are governed by securities legislation at the provincial or territorial level it remains to be seen whether these requirements will be uniformly adopted for offering memoranda in all Canadian jurisdictions. At the time of writing this update the Ontario Securities Commission had proposed amendments to its local rules that would require FLI contained in an offering memorandum to comply with these requirements.
For the vast majority of foreign non-reporting issuers that undertake private placements to “accredited investors” in Canada and include FLI or FOFI in their underlying documents these new rules will have no impact. These rules do not impose an audit requirement and the standards adopted for disclosure in the underlying documents would normally satisfy the new standards to be included in NI 51-102. The establishment of these rules, however, removes uncertainty and for just this reason alone is a welcome development.