Hellen Siwanowicz, McMillan LLP
On May 22, 2014, the Canadian Securities Administrators (“CSA”) published for comment proposed amendments to National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”), National Instrument 41-101 – General Prospectus Requirements, and National Instrument 52-110 – Audit Committees (“NI 52-110”) (collectively, the “Proposed Amendments”). The Proposed Amendments were circulated for comment until August 20, 2014.
If adopted, the Proposed Amendments would streamline the disclosure by venture issuers. In particular, the Proposed Amendments would (i) permit the MD&A for interim financial periods to be satisfied by a streamlined and highly focused report on quarterly highlights if a venture issuer does not have significant revenue; (ii) implement a new tailored form of executive compensation disclosure; (iii) reduce the instances in which a business acquisition report must be filed; (iv) create a new requirement for audit committees to have a majority of independent directors; (v) amend the prospectus disclosure requirements to reduce the number of years of audited financial statements required for venture issuers becoming reporting issuers and related amendments for continuous disclosure obligations; (vi) revise the annual information form disclosure for mining issuers to conform that disclosure to the amendments made to National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) in 2011; and (vii) clarify the executive compensation disclosure filing deadlines.
Quarterly Highlights
Currently, all issuers (venture and non-venture) are required to file quarterly interim MD&A using Form 51-102F1 – Management’s Discussion and Analysis. The Proposed Amendments would permit venture issuers without significant revenue to fulfill this requirement by preparing and filing a streamlined disclosure document referred to as “quarterly highlights”. The quarterly highlights consist primarily of a short discussion about the venture issuer’s operations and liquidity.
Business Acquisition Report
At present, all issuers (venture and non-venture) must file a business acquisition report (“BAR”) using Form 51-102F4 – Business Acquisition Report within 75 days of a significant acquisition. The BAR must include audited financial statements for the most recent financial year and pro forma financial statements. For venture issuers, an acquisition is ‘significant’ under the current regime if the asset or investment test specified in Part 8 of NI 51-102 is satisfied at the 40% level. The Proposed Amendments propose to increase this threshold for venture issuers from 40% to 100%, thereby reducing the instances where BARs are required and eliminate the requirement that BARs filed by venture issuers must include pro forma financial statements.
Executive Compensation Disclosure
At this time, all issuers (venture and non-venture) are required to file executive compensation disclosure using Form 51-102F6 – Statement of Executive Compensation. The disclosure requirements that apply to venture and non-venture issuers are nearly identical. The Proposed Amendments would provide for a new executive compensation disclosure form tailored specifically for venture issuers that would (i) reduce the number of individuals for whom disclosure is required from a maximum of five to a maximum of three (i.e. chief executive officer, chief financial officer and one additional highest paid executive officer); (ii) reduce the number of years of disclosure from three to two for each individual; and (iii) eliminate the requirement for venture issuers to calculate and disclose the grant date fair value of stock options and other share based awards in the summary compensation table. Instead, venture issuers would disclose detailed information about stock options and other equity based awards held and exercised.
Audit Committees
The Proposed Amendments contemplate venture issuers having an audit committee consisting of at least three members, a majority of whom could not be executive officers, employees or control persons of the issuer. This would not be a new requirement for TSX Venture Exchange listed issuers, which are already required to meet an almost identical requirement under that exchange’s policies. Under the Proposed Amendments, audit committee members of venture issuers would not be required to be independent for purposes of NI 52-110.
Audited Financial Statements and Continuous Disclosure Obligations
The Proposed Amendments would reduce from three to two the number of years of audited financial statements required to be included in an initial public offering prospectus for a venture issuer.
In addition, the Proposed Amendments contemplate conforming the prospectus disclosure requirements described above to the corresponding continuous disclosure requirements for venture issuers.
Mining Issuer Disclosure
The Proposed Amendments include revisions to Form 51-102F2 – Annual Information Form to conform to changes made to NI 43-101 in 2011.
Filing Requirements for Form 51-102F6 and Proposed Form 51-102F6V
The Proposed Amendments contain the requirements for filing executive compensation disclosure using Form 51-102F6 and proposed Form 51-102F6V. The CSA has proposed that non-venture issuers that are required to file an information circular file Form 51-102F6 not later than 140 days after their most recently completed financial year and that venture issuers that are required to file an information circular file Form 51-102F6 or proposed Form 51-102F6V not later than either 140 days or 180 days after their most recently completed financial year.
The CSA has been trying to streamline venture issuer disclosure since it circulated National Instrument 51-103 – Ongoing Governance and Disclosure Requirements for Venture Issuers for comment in 2011. The fact that this topic has been on the table for three years indicates its level of importance in the Canadian marketplace. The CSA believes that tailoring disclosure for venture issuers will enhance informed investor decision making for the venture issuer market by improving the quality of information available to investors, while reducing the regulatory burden for venture issuers. Only time will tell if the Proposed Amendments benefit the Canadian venture issuer market without unduly impacting investor protection.
Hellen Siwanowicz is a Partner at McMillan LLP.