CSA's proposed venture regime seeks to tailor regulation

Tim McCormick – The Canadian Securities Administrators (CSA) have introduced a new mandatory regulatory regime for venture issuers intended to provide a more tailored approach to the regulation of the venture market. As discussed in an earlier blog post, on July 29, the CSA published for comment proposed rules and rule amendments in the form of Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), which represents a comprehensive overhaul of the prospectus and private placement requirements, as well as continuous disclosure and governance obligations currently applicable to venture issuers. The CSA's proposals are ultimately intended to streamline venture issuer disclosure to reflect the needs of investors, while making disclosure requirements more suitable and manageable for issuers. The highlights of the proposals include replacing all current continuous disclosure and governance requirements (including audit committee and certification requirements) and modifying disclosure requirements in connection with long form prospectus offerings and rules for incorporation by reference in short form prospectuses and other documents. The proposals also introduce substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading and propose to require delivery of disclosure documents on request only in lieu of mandatory delivery. Some of these changes are discussed in detail below. Governance and Continuous Disclosure With respect to governance and continuous disclosure, the proposals introduce an annual report requirement, which would combine business, governance and executive compensation disclosure, audited financial statements, MD&A and CEO/CFO certifications into one document, to be filed within 120 days of the financial year-end. A mid-year report requirement is also introduced, which would include an interim financial report, associated MD&A and CEO/CFO certifications. The filing of three and nine month interim financial reports would be voluntary, but any such report would have to be filed on or before 60 days after the end of the interim period and be approved by the board or audit committee. In the event an issuer voluntarily elects to provide three and nine month interim reports, it would have to report on this basis for at least two financial years. The current information circular requirements would also be streamlined and the governance and executive compensation disclosure moved to the annual report. Additionally, an optional significance test would be introduced to permit significance to be calculated using market capitalization on the acquisition date rather than the on the date of announcement for significant transactions. Director and executive compensation disclosure would be tailored to venture issuers, who would also be required to disclose whether their directors and officers are subject to any statutory or contractual obligations requiring them to act honestly and in good faith and to exercise the care, skill and diligence of a reasonably prudent person. Of particular interest to mining issuers, the CSA clarified that the requirement to file a technical report under NI 43-101 would only be triggered if the venture issuer files a short form prospectus or, in the case of the annual report, if it contains first time disclosure of mineral resources, mineral reserves or a preliminary economic assessment, or a change to that disclosure, if that change is material to the venture issuer. Prospectus and exempt offerings In the case of prospectus offerings, the proposals would introduce a new Form 41-101F1 to conform to the disclosure required by the annual report and remove the requirement for business acquisition report (BARs) in connection with an offering, although financial statements would still be required for reverse take-overs and acquisitions that are 100% significant. Additionally, the proposals would require only two years of historical financial statements for IPOs. Disclosure of three and nine month interim financial statements and related MD&A would also be eliminated. Corresponding changes are also being proposed to the qualifying issuer offering memorandum and the TSXV short form offering document contemplated under NI 45-106. Definition of "Venture issuer" Finally, the amendments propose a new definition of "venture issuer" which would, unlike the current definition, exclude debt-only issuers, preferred share-only issuers and those issuing securitized products. This group of issuers that meet the current definition of "venture issuer" in NI 51-102, to be referred to as "senior unlisted issuers", will continue to be subject to the NI 51-102 venture issuer requirements. In proposing the changes, the CSA recognized the unique characteristics of the venture market in Canada and specifically outlined some of these attributes in their notice. For example, the CSA noted, among other characteristics, that venture issuers typically (i) have limited financial resources, which can make it more difficult to hire staff dedicated to securities regulatory compliance, (ii) may lack the foreseeable prospects of generating significant revenue and (iii) may be more likely to rely on financing to fund development for a prolonged period. They further note that venture investors are more likely to be retail investors with smaller positions than investors in more senior issuers, while limited institutional involvement and analyst coverage may result in investors having to conduct their own research in the absence of broker generated reports. Investors in venture issuers may expect more dramatic growth and are more likely influenced by material news than historical financial statements. They are also typically interested in the amount that officers and directors have invested and may be particularly concerned about the issuer's burn-rate. The CSA's proposals recognize the fact that venture issues play an important role in our capital markets and require a set of rules that better reflect the needs of venture investors and resources of venture issuers. The proposals are a step towards a more streamlined reporting regime. The proposals remain open for comments until October 29, 2011.

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