Proportional Regulation: An Update on Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers

November 19, 2012 | Blair C. Lowther

On July 29, 2011, the Canadian Securities Administrators (CSA) published for comment significant changes to the regulatory regime for venture issuers (see our article in the Summer 2011 edition). After reviewing comments received, on September 13, 2012, the CSA published a revised proposal. The proposed rules in NI 51-103 (“51-103”) are intended to streamline and tailor venture issuer disclosure in order to make disclosure requirements more suitable for issuers at this stage of development. The proposals address continuous disclosure and governance obligations as well as disclosure for prospectus offerings and certain exempt offerings. The proposed instrument consolidates the venture issuer requirements from NI 51-102, NI 52-109, NI 52,110 and NI 58-101. Further, the proposed instrument will not have companion policies, but instead will have short guidance notes in the body of the instrument.

This article summarizes the changes to the proposed rules in 51-103.

I. Interim Financial Reports

The original proposal stated that no interim financial reports or MD&A would be required for the 3 and 9 month interim periods, and that mid-year financial statements and a mid-year report (including MD&A) would be required for the 6 month interim period. In making the original proposal, the CSA noted that interim financial reports for the 3 and 9 month interim periods are not required in a number of international jurisdictions, for example, the United Kingdom. As such, the CSA questioned whether venture issuer investors used such financial reports. Most respondents commented that the full interim financial reports and MD&A currently required are not necessary for investors; however, some form of financial disclosure is appropriate. In response, the CSA explored various alternatives for interim reporting, including requiring a ‘direct method’ of accounting cash flow statements, similar to that used in Australia for junior mining companies.

Under the revised proposal, venture issuers must prepare financial statements for the 3, 6 and 9 month interim periods. The CSA does not propose that venture issuers provide MD&A similar to that required under NI 51-102; however, venture issuers would be required to prepare an interim report which includes quarterly highlights. In addition, the CEO and CFO would be required to certify that there are no misrepresentations in the interim financial report and quarterly highlights document.

II. Major Acquisitions

Several respondents commented that the 100% market capitalization threshold for determining whether an acquisition is significant is the appropriate threshold as it is indicative of a transformational transaction. In the revised proposal, the CSA has modified the test such that both the venture issuer’s market capitalization and the estimated value of the business to be acquired are determined prior to the announcement of the transaction. In doing so, it is no longer necessary to provide an optional significance test at the time of closing.

III. Pro Forma Financial Statements

Several respondents supported eliminating the requirements for pro forma financial statements in connection with a major acquisition as they did not believe that such statements provided useful information that was not available elsewhere. Accordingly, the revised proposal does not include a requirement for pro forma financial statements in relation to a major acquisition.

IV. Use of Proceeds Disclosure

The revised proposal contains enhanced requirements for disclosure of the use of proceeds in a short form prospectus. Although this enhanced disclosure is not currently required in a short form prospectus, the CSA believes that it is particularly relevant for venture issuers.

V. Definitions

For consistency, the CSA has revised and added a number of definitions in the proposed instrument to conform with other instruments, in particular, NI 51-102. Where the proposed instrument had defined a term differently than in NI 51-102 and it is not appropriate to use the same definition as NI 51-102, the CSA has either introduced a different term or redrafted the provision such that a defined term is not necessary.

VI. Application

Since the original proposal, the CSA has become aware of additional venture markets and additional senior markets and, as a result, has expanded its list of such markets. The CSA has eliminated the section that contemplated designating a market as a “designated venture market” as such designation may not be workable in all jurisdictions.

VII. Governance Responsibilities

The CSA has provided more comprehensive guidance regarding the types of policies and procedures a venture issuer may implement to comply with its governance responsibilities.

VIII. Audit Committees

In response to comments received, the CSA has enhanced the requirements for impartiality by venture issuer audit committees. Previously, the CSA proposed that a majority of the members of the audit committee must not be executive officers or employees of the venture issuer. The revised proposal adds to this list ‘control persons’ of the venture issuer, which is consistent with TSX Venture Exchange requirements.

IX. Executive Compensation Disclosure

Originally, the proposal required that executive compensation be disclosed in both the annual report and the information circular. The majority of respondents supported having executive compensation disclosure only in the information circular, noting that sophisticated investors know the information is in the information circular and it is, therefore, not necessary to duplicate it in the annual report.

The revised proposal requires venture issuers to disclosure executive compensation in the information circular only. The CSA states that this will ensure that the disclosure in readily accessible when securityholders are voting, will not result in redundancy and will not affect the timing of disclosure. In addition, consistent with the approach to disclosure taken in the U.S. for “smaller reporting companies”, the CSA proposes to require executive compensation disclosure for only the top three named executive officers of a venture issuer, rather than the top five.

The British Columbia Securities Commission, and other securities commissions in Canada, will accept comments regarding the proposed instrument until December 12, 2012.


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