On July 29, 2011, the Canadian Securities Administrators (CSA) published for comment Proposed National Instrument 51‑103 Ongoing Governance and Disclosure Requirements for Venture Issuers and Related Amendments (NI 51-103) which introduces a new regulatory regime for venture issuers (Proposal). The Proposal is intended to streamline and tailor venture issuer disclosure requirements. The Proposal addresses continuous disclosure and governance obligations as well as prospectus offerings and certain exempt offerings that require prescribed disclosure.  In addition, the Proposal indicates that NI 51-103 will not include a companion policy, but instead short guidance notes will be included in the body of NI 51-103.

Summary of the Proposal

The Proposal introduces a new definition of "venture issuer" which will exclude debt-only issuers, preferred share-only issuers and issuers of securitized products.  The CSA has indicated that the foregoing issuers are outside the scope of the Proposal.  These issuers will continue to be subject to venture issuer requirements under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102).

The proposed definition also excludes issuers which are subject to BC Instrument 51-509 Issuers Quoted in the U.S. Over-the-Counter Markets and the CSA also intends to exclude from the definition issuers subject to proposed Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets.

The Proposal would also replace the governance, disclosure and certification obligations of venture issuers currently provided under:

  • NI 51-102;
  • National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings;
  • National Instrument 52-110 Audit Committees; and
  • National Instrument 58-101 Disclosure of Corporate Governance Practices.

Governance and Continuous Disclosure Requirements under the Proposal

The Proposal outlines the following key proposals in respect of governance and continuous disclosure requirements:

  • introduction of an annual report (Annual Report) requirement that combines into one document business, governance and executive compensation disclosure, audited annual financial statements, associated management discussion and analysis (MD&A) and CEO/CFO certifications, which must be filed within 120 days of the venture issuers financial year-ends (currently there is no such requirement in place). Some examples of the disclosure requirements introduced by the Annual Report include: description of the business; a comparison of research and development expenses compared against executive compensation and general and administrative expenses; biographical disclosure of executives; reporting insiders; trading price information; and outstanding securities.  Unlike the annual information forms which venture issuers are only required to prepare in order to access the short form prospectus and other exempt offering regimes, all venture issuers will be required to file the Annual Report (which will enable them to access such offering regimes);
  • moving governance and executive compensation disclosure into the Annual Report and removing the requirement to include this information in the venture issuer's information circular.  As a result, biographical information with respect to continuing directors would not be required unless it had not been included in the most recent Annual Report.  Therefore, a cross-reference to the applicable section of the Annual Report in the information circular would be sufficient for the purposes of such disclosure;
  • voluntary filing of three and nine month (Optional Interim Period) interim financial reports (Financial Reports) and associated MD&A. As a result, venture issuers would no longer be required to file these Financial Reports and associated MD&A. Thus, investors looking to invest in a venture issuer that has elected not to file these Financial Reports will only have financial disclosure available to them that could be more than 6 months old. The Proposal indicates that if venture issuers decide to file Financial Reports for an Optional Interim Period, the Financial Reports must be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises and must be filed within 60 days after the end of the requisite Optional Interim Period.  Venture issuers opting to file the Financial Reports, would be required to issue a news release disclosing their intent to file same and the cover page of the Annual Report would require a statement, in bold text, that the venture issuer intends to file the Financial Reports for the Optional Interim Period.  Once a venture issuer has decided to file the Financial Reports, it would be required to do so for a minimum period of two years;
  • introduction of a mid-year report that would include a six month interim financial report, associated MD&A and CEO/CFO certifications, which must be filed within 60 days of the end of the mid-year period;
  • a requirement that the majority of the members of the venture issuer's audit committee not be executive officers or employees of the venture issuer or its affiliates. This requirement is similar to the requirement found under many Canadian corporate statutes;
  • introduction of enhanced material change reporting, including financial statements for acquisitions that are "100%" significant based on the market capitalization of the venture issuer, which would replace business acquisition reports (BARs). Although the material change report would need to be filed within 10 days of the acquisition, the financial statements with respect to same would need to be filed within 75 days after the transaction as is currently the case for BARs;
  • introduction of the obligation to report on a timely basis any "material related entity transactions". A "material related entity transaction" is defined in the Proposal as one or more of the following, if material to the venture issuer: (A) a related party transaction as defined in the issuer's GAAP; (B) an oral or written agreement, or a transaction, to which a venture issuer is directly or indirectly a party and to which a person or company that is a related entity (as defined in the Proposal) of the venture issuer at the time of entering into the agreement or agreeing to the transaction is also a party; or (C) a material amendment to an agreement referred to in (B).  The Proposal also provides that venture issuers will not be permitted to file reports of  "material related entity transactions" on a confidential basis;
  • substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading. Under the Proposal venture issuers will be required to disclose each person or company, other than executive officers, that, to the knowledge of the venture issuer, is or was, during the last completed financial year a "reporting insider" (as defined in NI 55-104 Insider Reporting Requirements and Exemptions);
  • requiring individualized compensation disclosure for directors and named executive officers (NEOs) consistent with Form 51-102F6 Statement of Executive Compensation, which will be tailored to venture issuers.  The CSA had considered requiring only aggregated disclosure but determined not to reduce the level of disclosure. The Proposal indicates that venture issuers should be required to provide compensation disclosure for the venture issuer's two most recently completed financial years.  In addition, the Proposal attempts to enhance compensation disclosure by requiring venture issuers to describe and explain significant elements of compensation, enhancing the required discussion of performance criteria or goals and requiring disclosure of how each significant element of compensation is determined; and
  • introducing an alternative method of mailing annual reports, mid-year reports and information circulars to shareholders through the "notice and access" system. A venture issuer relying on this system would be required to issue a news release with certain prescribed disclosure within the time periods prescribed by the Proposal.  

The Proposal outlines the following key proposals in respect of prospectus and certain exempt offerings:

  • modifying disclosure obligations of venture issuers in connection with a long form prospectus under NI 41-101 – General Prospectus Requirements.  The disclosure required under Form 41-101F1 will be modified by introducing a new form to be used by venture issuers, which will conform to the disclosure required by the Annual Report.
  • requiring only two years of historical financial statements in initial public offering prospectuses, rather than the current requirement to include three years of historical financial statements; and
  • modifying the documents required to be incorporated by reference in the case of: (A) a short form prospectus under NI 44-101 Short Form Prospectus Distributions; (B) a qualifying issuer offering memorandum under NI 45-106 Prospectus and Registration Exemptions (NI 45-106); and (C) the TSX Venture Exchange short form offering document considered under NI 45-106.  Under the Proposal, NI 44-101 and NI 45-106 will be revised to permit incorporation by reference into any of (A), (B) or (C) of the continuous disclosure documents contemplated under the Proposal, rather than the continuous disclosure currently required under NI 51-102.  

In addition, the Proposal provides that three and nine month interim financial reports and associated MD&A would not be required in connection with a prospectus offering or one of the exempt offering disclosure regimes discussed above.   

Moreover, amendments to NI 43-101 Standards of Disclosure for Mineral Projects are being proposed to introduce the filing of a preliminary short form prospectus as a trigger to file a technical report for venture issuers.  Also, where a venture issuer's Annual Report contains disclosure that would trigger a technical report under paragraph 4.2(1)(j) of NI 43-101 (i.e. first time disclosure of mineral resources, mineral reserves or a preliminary economic assessment or a change to that disclosure, if that change is a material change to the venture issuer), then the venture issuer will be required to file a technical report.

Conclusion

Given the significance of venture issuers to the Canadian marketplace, it is not surprising that the CSA has undertaken the Proposal to streamline and enhance the continuous disclosure regime applicable to venture issuers.  The Proposal provides venture issuers and their advisors with a continuous disclosure framework which will be implemented in the near future.  In addition, through the introduction of the Annual Report, there will be an enhancement to venture issuer disclosure available to investors purchasing securities in the secondary market. The Proposal also contains pointed questions addressed to market participants, relating to, among other things, the following matters: (i) the replacement of the quarterly financial reporting requirement currently in place with a semi-annual reporting requirement and voluntary three and nine-month reporting; (ii) the replacement of the requirement to file BARs for significant acquisitions with a requirement to file financial statements of the acquired business and only for acquisitions that are 100% significant, measured by the venture issuer's market capitalization, to the venture issuer; and (iii) relocating director and executive compensation and governance disclosure from the venture issuer's information circular to the Annual Report.

The comment period for the Proposal ends on October 27, 2011.