Being a Canadian reporting issuer involves compliance with a complex set of requirements. The Canadian Securities Administrators (CSA) have published Consultation Paper 51-404 – Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers (the Paper), which explores possible ways to reduce the regulatory burden faced by issuers. Any changes made to the regulatory regime must be balanced with investor protection concerns and the need for efficient capital markets. The Paper introduces a broad range of proposed reforms, including relief for smaller issuers, streamlined rules for both offerings and continuous disclosure, including reducing duplicate disclosure requirements and enhancing electronic delivery of documentation.
The CSA is seeking public comment on the options described in the Paper and is also soliciting proposals from the public on other ways to reduce the current regulatory burden. Comments on the Paper must be received by July 7, 2017.
Key proposals of the Paper
Potential relief for smaller reporting issuers
Venture issuers are currently relieved from some of the more rigorous requirements generally applicable to other issuers. Venture issuers (which include issuers listed on the TSX Venture Exchange) benefit from:
a longer period to file financial statements;
a higher threshold that triggers significant business acquisition reporting;
no requirement to file an annual information form (AIF);
a simplified governance disclosure (including executive compensation disclosure); and
reduced CEO/CFO certification requirements in respect of financial information and processes.
Venture issuers also have the option of preparing, in lieu of interim MD&A, a simpler disclosure document known as Quarterly Highlights. They are also not required to prepare an AIF unless they wish to access the short-form prospectus regime.
To qualify for the reduced requirements, an issuer must be a venture issuer, which is an issuer not listed on a senior exchange such as the Toronto Stock Exchange’s main market.
The Paper asks market participants if the current categorization based on an exchange listing should be replaced with a metric based on an issuer’s assets, revenue, market capitalization or other criteria. The Paper notes the SEC’s concept of a “smaller reporting issuer,” which is based on an issuer having a public float of less than $75 million or, where the issuer has no publicly traded equity, on the issuer having revenues of less than US$50 million. This change, if implemented and adapted for the Canadian market, would likely result in smaller issuers listed on the TSX having a reduced regulatory burden similar to venture issuers. Alternatively, the Paper seeks comments on whether there should be less onerous requirements for venture issuers than are currently imposed.
Reducing financial statements required in an IPO prospectus. Venture issuers are required to include only two years of financial statements in an IPO prospectus as opposed to three years for other issuers. In addition, the prospectus regime provides an exemption that relieves an issuer from requiring an audit of its second and third most recently completed financial years depending on an issuer’s size. Consideration is being given to allow non-venture issuers to reduce the number of years of audited financial statements required in an IPO prospectus if they have revenues pre-IPO below a certain threshold. Alternatively, the CSA asks market participants for their views on reducing the financial statements required for all issuers. The CSA seeks comment on whether this would result in more efficient capital raising.
Streamlining public offerings for reporting issuers. The CSA is considering whether an alternative model for short-form prospectus offerings that is more closely linked to an issuer’s continuous disclosure and provides investors with more concise and focused offering information is appropriate. The CSA has considered, but not implemented, an integrated disclosure system in the past. Such a system would have required issuers to provide investors with comprehensive and timely continuous disclosure but using an abbreviated offering document. The Paper also raises the issue of reducing or eliminating disclosure required in a short-form prospectus where the information is available elsewhere. The CSA also solicits comments on whether the short-form prospectus eligibility requirements should be extended to other issuers who cannot currently rely on it.
Streamlining other prospectus requirements. The Paper outlines several options to reduce the cost of completing an offering. These include:
increasing the thresholds that trigger business acquisition reporting by non-venture issuers;
removing the requirement to have interim financial statements contained in a prospectus reviewed by an auditor;
removing the requirement to include proforma statements for significant acquisitions; and
tailoring non-IPO disclosure to focus on certain key areas: overview of the business, key information on management, conflicts of interest, securities distributed, relevant rights and principal risks facing the business.
At-the-market transactions (ATM). To facilitate ATM offerings in Canada, comment is sought on whether the rules applicable to ATMs can be relaxed or eliminated while still providing adequate investor protection.
Business Acquisition Report (BAR). The CSA is seeking comment on whether the requirement to file a BAR should be removed in certain circumstances, whether certain of the significance tests that trigger a BAR should be removed, whether the thresholds that trigger the filing of a BAR should be increased and finally, should there be alternative BAR tests for industry-specific issuers. The CSA also wants to hear from market participants on how relevant BAR disclosure obligations are.
Reduce Annual and Interim Disclosure.The Paper seeks comments on whether disclosure in annual and interim reports should be reduced by removing from MD&A a discussion of prior period results and the summary of quarterly results for the eight most recently completed quarters. In addition, should all issuers have the option to provide a simplified Quarterly Highlights document in lieu of quarterly MD&A?
Semi-Annual Reporting. The CSA is considering whether the rules should allow semi-annual as opposed to quarterly reporting to address a perceived short-term focus on financial results. If so, should all reporting issuers be able to report every six months? This change, if implemented, would bring Canada in line with certain foreign jurisdictions, including the UK and Australia.
Addressing regulatory overlap. The CSA notes the similarity of certain disclosure required by IFRS in financial statements and by securities laws in an issuer’s MD&A and AIF. These areas include disclosure regarding risk factors, contractual obligations, changes in accounting policies and financial instruments. The CSA is considering whether consolidating the disclosure in an issuer’s MD&A, AIF and financial statements into one document would be more efficient or would such consolidation result in investors receiving a lack of information.
Electronic Delivery of Documents
The Paper is seeking comment on whether new methods of electronic delivery should be introduced to further reduce the use of paper to satisfy delivery requirements prescribed by securities laws that create significant burdens for issuers.
The Paper outlines other modernization efforts recently undertaken by the CSA to facilitate greater access to capital. These changes include introducing new prospectus exemptions, including exemptions for crowdfunding, rights offerings, investment dealers and existing security holders. In addition, the relaxation of the regulations applicable to venture issuers and pre-marketing of prospectus offerings were also intended to improve access to capital. The CSA is considering separately the effectiveness of the re-sale regime, rules relating to investment funds and establishing a national filing system.
The scope of the Paper is broad and while the CSA has specifically stated it will not commit to make any changes, the Paper provides an excellent opportunity for issuers and other capital market participants to provide meaningful input on the modernization of securities regulation. A copy of the Paper is available here.