On April 6, 2017, the Canadian Securities Administrators (CSA) released Consultation Paper 51-404 – Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers. The paper identifies and offers for consideration options to reduce the regulatory burden associated with raising capital in the public markets and with the continuous disclosure regime, without compromising investor protection or the efficiency of the Canadian capital markets.
The paper sets out five options to reduce regulatory burdens for non-investment fund reporting issuers: (i) extending the application of streamlined rules to smaller reporting issuers; (ii) reducing the regulatory burdens associated with the prospectus rules and offering process; (iii) reducing ongoing disclosure requirements; (iv) eliminating overlap in regulatory requirements; and (iv) enhancing electronic delivery of documents.
Each proposal is accompanied by a series of consultation questions to assist the CSA in its evaluation of regulatory burden. Comments must be submitted to the CSA by July 7, 2017.
Extending Streamlined Rules to Smaller Reporting Issuers
Currently the reporting regime delineates TSX-Venture Exchange issuers and non-venture issuers, permitting the former to comply with continuous disclosure requirements that are generally less onerous than those to which the balance of reporting issuers are subject. Recognizing that listing status is not necessarily a proxy for issuer size, the CSA is soliciting views on alternative metrics for reporting requirements.
The paper proposes a size-based metric (e.g. size of assets, revenue, market capitalization or some combination of criteria) to distinguish between issuers, which would more closely align with securities regulation south of the border. The U.S. Securities and Exchange Commission allows for reduced reporting requirements for “smaller reporting companies,” which are defined as registrant companies with less than US$75 million in common equity public float or, in the case of companies without publicly traded floats, less than US$50 million in revenue. In addition, companies with annual revenue under US$1 billion qualify as “emerging growth companies” and are afforded reduced regulatory and reporting requirements under the U.S. Jumpstart Our Business Startups Act (2012) (JOBS Act).
The CSA acknowledges that a similar quantitative threshold approach to regulation and reporting requirements, adjusted to reflect the smaller scale of Canadian capital markets, might be an option worth considering.
Reducing the Regulatory Burdens for Prospectus Offerings
Audited financial statement requirements in an IPO prospectus
Under the current rules, an issuer must include in an IPO prospectus audited financial statements for its three most recently completed financial years. Venture issuers need include only two years, and an exemption from the audit requirement is available for issuers of a certain size. The CSA is considering broadening the eligibility to include two years of audited financial statements in an IPO prospectus either to all issuers or to “smaller issuers” who fall below a certain threshold. We note that a two-year requirement would be consistent with the JOBS Act and would encourage companies undertaking an IPO in the United States to cross-list on a Canadian exchange.
Streamlining other prospectus requirements
The CSA is reconsidering other prospectus requirements with the aim of reducing preparation costs, including increasing the thresholds for filing business acquisition reports (BARs) for non-venture issuers, removing the requirement for interim financial statements to be reviewed by an auditor and removing the requirement to include pro forma financial statements for significant acquisitions.
Streamlining public offerings for reporting issuers
To reduce the time and cost of preparing a short form prospectus, the CSA is also considering modifying the short form disclosure requirements that are perceived as duplicative, irrelevant or misaligned with current market practices. As examples of such requirements, the CSA notes that risk factor disclosure in short form prospectuses is often repetitive and boilerplate and that the prescribed disclosure of price ranges and trading volumes is easily accessible on the website of the applicable exchange. While it is not apparent that removing these or similar requirements would reduce preparation costs in any meaningful sense, the proposals to remove the requirements for auditor review of interim financial statements and pro forma financial statements for significant acquisitions would go a long way to reducing the regulatory burdens of prospectus filings.
Alternative prospectus model
The CSA is also considering revisiting earlier efforts to adopt an alternative prospectus model that would provide for more concise and focused disclosure than under the current short form prospectus regime. The model would necessarily be more closely linked to the continuous disclosure regime, requiring issuers and dealers participating in an offering to assume liability for any misrepresentation in the continuous disclosure base. To make the expanded scope of liability manageable, we would expect the disclosure base to be limited to the currently prescribed set of documents that are incorporated by reference into a short form prospectus.
The paper also surveys the limitations in the current at-the-market (ATM) offerings regime that have been voiced by market participants. In light of the prevalence of ATM offerings in the United States in contrast to the relatively fewer offerings in Canada, the CSA is soliciting feedback for ways in which the current restrictions on ATM offerings could be relaxed without compromising investor protection and the integrity of the capital markets.
Pre-marketing and marketing regime
The CSA is seeking marketing participant input on desirable rule amendments and/or processes that could be adopted to further liberalize the prospectus pre-marketing regime for both existing issuers and those planning an IPO.
Reducing Ongoing Disclosure Requirements
Removing or modifying the criteria to file a BAR
The CSA is considering undertaking a broad review of the current BAR requirements, and has suggested that it could consider removing the requirement to file a BAR in certain circumstances, increasing the threshold applied to the three significance tests for non-venture issuers and providing alternative, industry specific significance tests.
Permitting semi-annual reporting
The CSA previously considered and abandoned semi-annual reporting on several occasions. In light of the continued debate on the affect (deleterious or not) of quarterly reporting on long-term value creation, the CSA is again revisiting the issue. The CSA is now proposing to provide the option, either to all issuers or only to smaller issuers, to report on either a quarterly or a semi-annual basis.
The CSA is considering reducing the volume of information that is currently included in annual and interim filings to better focus the documents on key information.
The CSA is soliciting feedback on ways to consolidate or otherwise remove reporting overlap under National Instrument 51-102 – Continuous Disclosure Obligations.
Feedback is also solicited to assist the CSA in identifying undue elements in the delivery requirements, including "notice-and-access", and to consider whether new methods of electronic delivery should be permitted.