Rule changes came into effect on December 31, 2007 regarding disclosure of forward-looking information.
The securities regulators acknowledge that forward-looking information is of value in many circumstances. The rules are not meant to prevent it. Rather, they recognize that forward-looking information may mislead investors unless it is appropriately prepared and presented with full disclosure of the underlying assumptions and the associated risks.
There are two basic requirements: (i) rules relating to initial disclosure of forward-looking information, and (ii) ongoing obligations to update, compare to actual results and, if appropriate, withdraw the information. For the most part, the recent changes simply streamline and clarify the pre-existing position. However, one key change is worth noting. What was previously policy guidance by the securities regulators for updating forward-looking information and disclosing earnings guidance is now a legal requirement.
The rules are now in one place, in National Instrument 51-102 Continuous Disclosure Obligations. This reflects the reality that most forward-looking information is contained in continuous disclosure documents — mainly news releases, MD&A and annual information forms.
The rules do not apply to forward-looking information that is presented orally. Oral statements are dealt with separately in legislation adopted by a number of provinces, which creates civil liability for secondary market disclosure. Also, the new rules do not apply to disclosure of oil and gas or mining reserves; this is the subject of separate, more detailed disclosure requirements.
An old rule, National Policy 48 Future-Oriented Financial Information, has been revoked. With it went a requirement for auditor review of future-oriented financial information.
What Exactly is Forward-Looking Information?
Forward-looking information is "disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection."
The second part of the definition refers to two specific subsets, each dealing with financial information: (i) financial outlooks, and (ii) future-oriented financial information or FOFI.
The more common type is a financial outlook. This is "forward-looking information about prospective results of operations, financial position or cash flows that is based on assumptions about future economic conditions and courses of action and that is not presented in the format of a historical balance sheet, income statement or cash flow statement." Examples of financial outlooks include expected revenues, net income, earnings per share and R&D spending. A financial outlook relating to earnings is typically called earnings guidance.
Less common is the more formal "future-oriented financial information," or FOFI, defined as "forward-looking information about prospective results of operations, financial position or cash flows, based on assumptions about future economic conditions and courses of action, and presented in the format of a historical balance sheet, income statement or cash flow statement."
Disclosing Forward-Looking Information
Disclosure of material forward-looking information carries two initial obligations:
1. There must be a reasonable basis for it.
- This refers to the reasonableness of the assumptions, plus the process followed in preparing and reviewing the forward-looking information.
- No other guidance is given as to what constitutes a reasonable basis, but one thing is clear — the test is applied when the disclosure is made, not later with the benefit of hindsight.
2. Cautionary language must be included.
- The information must be identified as forward-looking.
- Users must be cautioned that actual results may vary. Risk factors that could cause actual results to differ materially must be identified.
- Material factors or assumptions used to develop the forward-looking information must be identified.
- The issuer’s policy for updating forward-looking information, if it includes procedures in addition to those required (and outlined below), must be described. Most issuers will not have any additional procedures.
If the forward-looking information is FOFI or a financial outlook, then additional obligations apply:
1. The assumptions used must be reasonable.
- The FOFI or financial outlook must be based on assumptions that are reasonable in the circumstances.
- Those assumptions include that the FOFI or financial outlook must (i) be limited to a period for which the information can be reasonably estimated, and (ii) use the accounting policies that the reporting issuer expects to use to prepare its historical financial statements for the period covered.
2. Additional disclosure is required.
- If not dated, then the date management approved the FOFI or financial outlook must be disclosed.
- Its purpose must be explained.
- Readers must be cautioned that the information may not be appropriate for other purposes.
Updating Forward-Looking Information
After forward-looking information has been disclosed, issuers have ongoing obligations to update, compare to actual results and, if appropriate, withdraw the information.
- New events and circumstances that are reasonably likely to cause actual results to differ materially must be disclosed, and the differences expected to result must be discussed. This applies to forward-looking information for a period not yet completed.
- Material differences between actual annual or interim financial results and any earlier FOFI or financial outlook for the period must be disclosed and discussed.
- Any decision to withdraw the forward-looking information must be disclosed. The events and circumstances that led to this decision must be discussed, as must the assumptions underlying the forward-looking information that are no longer valid.
Updating reports must be covered in the next MD&A, unless contained in an earlier news release. If the latter, then the subsequent MD&A must refer to the earlier news release.
Application to Other Documents and to Non-Reporting Issuers
Most forward-looking information is contained in reporting issuer continuous disclosure documents — mainly news releases, MD&A and annual information forms. It can appear in other documents, too, such as a prospectus, rights offering circular or private placement offering memorandum. Finally, forward-looking information may be found in places beyond continuous disclosure or offering documents, such as on a reporting issuer’s website or in its written marketing materials. The new rules apply to most of these situations.
The rules clearly apply to prospectuses (both short form and long form) and rights offering circulars, as well as to reporting issuer website contents and written marketing materials. The position with respect to a private placement offering memorandum is more complicated. The answer depends on three factors — the prospectus exemption being relied on, the province of distribution and whether or not the issuer is a reporting issuer.
- If an offering memorandum is delivered by an issuer (whether or not a reporting issuer) to a purchaser in Ontario in connection with the most commonly used capital raising prospectus exemptions (for example, the ‘accredited investor’ exemption), then the issuer must comply with the rules described above regarding disclosure of forward-looking information. If the issuer is a reporting issuer, then the obligation to update the information also applies. If the issuer is not a reporting issuer, it has no obligation to update.
- The position is the same if an offering memorandum is delivered to a purchaser in a province other than Ontario in reliance on the offering memorandum exemption in Section 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions. That exemption is not available in Ontario.
- If an offering memorandum is delivered by an issuer (whether or not a reporting issuer) to a purchaser in a province other than Ontario in connection with another capital-raising prospectus exemption, then compliance with the rules regarding disclosure of forward-looking information is not necessary. However, the issuer should consider complying regardless.
McCarthy Tétrault Notes:
Reporting issuers should take note of the heightened attention that securities regulators accord to forward-looking information. While issuers have a good track record of identifying the presence of forward-looking information in continuous disclosure documents, that identification has often been too "boilerplate" in style. Particular care should also be given to identifying the material factors or assumptions used to develop the forward-looking information and the risk factors that could cause actual results to differ materially.
In addition, both reporting and non-reporting issuers should be mindful of the complicated rules regarding use of forward-looking information in a private placement offering memorandum.